I want to invest for 3 years - it is good decision to invest in equity funds?Asked
Lumpsum investment is preferred by investors who have huge chunk of money. People who have a regular flow of money prefer to invest their regular flow of income in equity funds via SIP (Systematic Investment Plan).
Advantages of investing in Lumpum:
However, with lump sum investment, an investor is exposing himself to the vagaries of the market, as there is always a chance of mistiming the market. The risk is higher when it comes to Lumpsum method of investment than as compared to an SIP.
In equity mutual funds, money gathered from the investors is invested into the stock market. The risk level is high as equity market is quite volatile.
A lot depends on the risk appetite of the investor. With high returns comes higher risks and due diligence should be taken while investing.
For more information on equity funds refer to the given link: Equity funds
Investing in equity funds for a duration of 3 years is generally said to be less risky and may give significant returns to the investors. One of the 2 routes of investing in mutual funds is lump sum investment in the fund.
Our suggestion would be yes you can invest a lump sum amount in equity mutual fund for a duration of 3 years. You can invest in a large cap fund or a mid cap fund depending on how much risk you are willing to take and how much returns are you expecting from your investment.
Returns in a large cap equity fund usually vary from 13-15% and returns in a mid cap fund usually range from 16-18%. And if the amount is invested when markets are low the returns could be significantly higher in both the large and mid cap funds.
Also you may look at the 2nd route of investing SIP also, using SIP for you investments gives you added advantage of rupee cost averaging and lowering the burden or dividing the burden of single investment into small parts.
To read more about SIP please click here
Please note the returns stated above are based on past analysis of funds and there is no guarantee that the funds may perform similarly in future also.
Some of the top performing equity mutual funds in large and mid cap category are:
Before you start the investment in lump sum, it is essential to be very clear about your expectations of returns and liquidity.
If you are sure about the fact that you would not require the amount back before 3 years at least (average time considered for an equity to start yielding good returns), then you may consider investing in equity funds. Otherwise, debt funds would be a better option if the liquidity requirement is before 3 years.
While you invest in lump sum, it is apparent that the invested amount is big and hence if the investment is in equity funds, then you should certainly give your large sum of money the time to stay in the market for a longer period (minimum 3 years) so that it adjusts itself to market fluctuations.
If you want to minimize the liquidity period and you want to go for safer option, then you may consider putting your money into ultra-short term fund with a Systematic Transfer Plan. STP will allow you to regularly allocate a fixed amount in equity fund investment each month.
If you are ok with taking risk you can invest in Large cap funds.
You can check out large cap funds here - https://groww.in/mutual-funds?q=large+cap
Else go for STP from debt funds to equity funds.
If you are planning to invest lump sum amount for only 3 years, equity funds may not turned out to be a feasible option. Lump sum amount in equity funds are usually suggested to those investors who wants to invest for at least a period of 4-5 years. But you can invest in other category of mutual funds i.e. balanced funds.
Balanced funds are those funds in which the capital of the investor is diversified across different financial instruments such as stocks, bonds, debt securities, etc to limit the risks. These funds are also known as hybrid funds.
Types of balanced funds:
I would suggest you to invest in equity oriented balanced funds if you want to invest for only 3 years. They are developed by the fund managers to deliver the inflation beating returns and at the same time keeping risk in check.
Another way to invest lump sum amount is through STP (Systematic Transfer Plan). For investing a lump sum amount, you always want to invest at the lowest price. But knowing the current price is high or low is challenging. STP is an automated way of transferring money from one mutual fund to another. You can also transfer the money from the debt funds to equity funds through STP.
Investments in equity funds should be made for a long term i.e 3 years or more. This is done because the risk involved in equity funds is high as compared to debt funds.
Investments in lumpsum should be preferred by investors who have huge chunk of money. People who have a regular flow of money prefer to invest their regular flow of income to equity funds via SIP (Systematic Investment Plan). Investment can be made lumpsum in a mutual fund and later Sytematic Transfer Plan (STP) can be done from a liquid fund to an equity oriented fund.
Investing in equity funds via lumpsum will give higher returns as compared to investment made in the same fund via SIP. This happens because of the Power of Compounding. In case of lumpsum, if INR 360 is invested for 3 years then that 360 is invested for the entire period of 3 years, whereas in case of SIP INR 10 is invested every month till 36th month. So in this case INR 10 is invested for 36 months, next INR 10 is invested for 35 months and so on. So it is definitely advisable to invest in lumpsum if the investor has idle money to invest.
Types of equity funds are:
· Large Cap Funds: A large portion of investment is done in companies with large market capitalization. Large cap are big, well established companies of the equity market. These companies are strong, reputable and trustworthy. Investment in large cap fund is best suited for investors with low risk appetite and for investment of lumpsum amount.
· Mid Cap Funds: A large portion of investment is done in companies with medium market capitalization. Stocks of mid cap companies are riskier then large cap but not as risky investment instrument as small cap
· Small Cap Funds: A large portion of investment is done in companies with small market capitalization i.e. having a market cap of less than INR 500 crore. Stocks of small cap companies highly risky and volatile investment instrument.
· Balanced Fund: Balanced funds are investment instrument, where an asset management company invest the money gather into both debt and equity. These are highly diversified mutual funds.