You can either choose to make a lump sum investment or invest small amounts of money regularly in a mutual fund through a Systematic Investment Plan (SIP). Both strategies of investing are great and the one you should select depends on the type of mutual fund you are investing in and what your financial goals are.
Debt funds tend to be an excellent choice for lumpsum investments. They don’t have any lock-in period and can produce higher returns than fixed deposits.
Why opt for lumpsum investments in debt funds?
A debt fund has two revenue streams. First, revenue from coupon or interest payments on its bond holdings. Second, prices of underlying assets fluctuate when interest rates change, and this can lead to capital gains.
You can also get liquidity from debt mutual funds through Systematic Transfer Plans (STP). With an STP, you can invest a huge amount in debt funds and routinely move a small percentage of that money into hybrid or equity funds. By spreading your investment over a few months rather than doing it all at once, you can reduce the risk associated with investing in stocks.
Also, when made during a period of market slump, a lump sum investment performs better than an SIP. However, lump sum investing may not be successful if one over-invests during a period of stretched market valuations.
Wondering how to invest lumpsum in debt funds? By checking these parameters
A fund ought to have a good track performance. Pick a fund house with a proven track record of producing reliable performance. Check the fund’s one, three, and five-year returns to see if it has outperformed the benchmark.
Debt funds provide various investment options, each with a different maturity length. You should base the investment decision on the maturity length. For instance, a short-term debt fund would be the best choice if your investment horizon is a year.
- Tax Efficiency
Any gains from debt funds are taxed only at the time of redemption. The gains are taxed either as Short-Term Capital Gains (STCGs), if redeemed before 36 months, or Long-Term Capital Gains (LTCGs), if redeemed after 36 months. STCGs on debt funds are taxed as per your income tax slab while LTCGs are taxed at 20% with indexation benefits. When investing lumpsum in debt funds, consider what your current income tax slab is. This is because debt funds tend to be more tax-efficient and can help produce better post-tax returns when held for longer than three years, depending on your income slab rate.
Debt funds are a great avenue for parking your savings by making lumpsum investments. That’s because not only do they help with capital preservation, but also allow you to earn returns that are higher than traditional fixed-income assets like bank deposits.