Investment, in simple terms, can be defined as the act of allocating resources. In the financial world, you assign a part of your income to investment plans, an action that will help you to accumulate wealth over time. However, it is essential to remember investments are not a monolith. They can be broadly categorized into two. Namely:
What are lump sum investments?
A lump sum investment is a one-time payment from an investor rather than a monthly payment, as with a systematic investment plan. While the word lumpsum is commonly associated with windfall earnings, such as a retirement or pension plan, you could also opt to allocate funds just once if you happen to have disposable money for that purpose. For example, if you have a windfall earning of ₹1.2 lakhs and are thinking of investing it, you could opt to make a one-time lumpsum investment instead of allocating it over months.
What are the critical features of lumpsum investments?
- Lumpsum is an amount of money due that is paid all at once instead of being born in regular installments.
- All investors need for lumpsum payments is the real money in hand and higher risk tolerance.
What are the common mistakes one must avoid with lumpsum investments?
Listed below are some of the common mistakes that you should avoid with lumpsum investments:
Not identifying financial goals:
A financial goal is a monetary target you aim to achieve over time. Examples of a financial plan, including corpus for your child’s higher education, foreign vacation, retirement, marriage, etc., can be financial goals that will give you a clear idea of how much to save and regularly invest to achieve your life goals. This helps in providing direction to your investments and creating an optimum asset allocation strategy based on your risk appetite, presumed rate of return, and time horizon. So, identifying financial goals is an absolute must if you are considering any investment, but it is essential, especially for lumpsum investments.
Not ensuring that you have the money at hand:
As stated earlier, lumpsum investments are a one-time payment. So, if you are considering opting for this investment option, you need to ensure that you have the necessary balance in your account.
Not taking note of the inflation:
Another common mistake many investors make is ignoring the impact of inflation on their financial goals. By reducing the purchasing power of money, inflation can land you with an inadequate corpus for meeting your financial goals. Therefore, while investing, you need to make sure to factor in the historical inflation trend.
- Mixing insurance with investment
The primary objective behind purchasing a life insurance policy is to provide a replacement income to one’s family in case of their untimely demise. Investors generally mix insurance with investment and, thereby, end up investing in endowment and money-back policies, which is a significant misstep. Such insurance policies fail to provide adequate life cover, generate sub-optimal returns, and have low liquidity features. On the other hand, term insurance policies offer higher cover at a meager premium.
Not maintaining emergency fund:
The main aim of maintaining an emergency fund is to deal with financial emergencies and meet unavoidable expenses during income loss. Therefore, this fund should be large enough to meet inevitable monthly payments, including EMIs, SIPs, insurance premiums, children’s education fees, rent, etc., for at least six months. Without an adequate emergency fund, you may be forced to either redeem your long-term investments or opt for a loan at higher interest rates to deal with such financial difficulties. Unforeseen exigencies during market corrections may further force you to redeem market-linked investments at a loss. Hence, ensure you set aside an adequate emergency corpus to meet your financial needs during emergencies.
Apart from the five above, there are several other mistakes that you need to avoid if you are opting for a lumpsum investment. If you lack the funds, you could opt for a SIP instead, as they allow you to enjoy the benefits of investing while not being a burden on your wallet.
Mutual Fund Investments are subject to market risks; read all scheme-related documents carefully.