You may have heard the disclaimer “Mutual Fund Investments are subject to market risks”. This says a lot about lumpsum investments and the risks involved. There are a lot of risks involved in lumpsum investment as it goes through various ups and downs during the investment horizon.
In this article, we will learn how you can manage and reduce the risk in lumpsum investments. Moreover, you can use a lumpsum calculator to estimate the future value of your lumpsum investment.
Relationship between Risk and Returns
Risk and reward carry a unique relationship. All types of investments carry risk. Now depending on the level of risk, you can expect the returns. This means the higher the risk higher the returns and the lower the risk the lower the return.
If you invest in equity mutual funds, stocks etc then there is high risk due to market volatility. But in the long run, these investments also give high returns.
Whereas investments like liquid mutual funds, fixed deposits, PPF etc have less risk as they give assured returns. But with low risk, their returns are also very low as compared to equity.
How to reduce Risk in Lumpsum Investment?
Lumpsum investments always carry risks due to market volatility, geopolitical conditions and various other factors. Here are some tips that can help you to manage the risks in lumpsum investments.
- Invest for a Goal
Investing with a goal can help you plan your finances in a better manner. This will help you to pick the right kind of mutual fund. Suppose you have the goal to plan for the retirement or wedding of your daughter then the investment duration is around 15-20 years. In such cases, it is advisable to invest in equity mutual funds.
But if your goals are for the short term like planning for vacation or creation of emergency funds then you can go for liquid mutual funds. Liquid mutual funds can be redeemed immediately when the need arises. So allocating funds as per the investment goals reduces the risk.
- STPs for Lumpsum Investments
If you are worried about ups and downs in lumpsum investments, then there is a good option that can save you from this worry. It is a Systematic Transfer Plan also known as STP. It allows you to shift from one mutual fund scheme to another instantly without any hassles.
This is done to take advantage of market conditions and gain higher returns. You require a minimum amount of ₹12000 for this scheme.
- Adjustment of Duration
This is an aggressive strategy and applicable to bond funds. Fund managers keep on switching bond funds depending on the duration of the bonds. So, if the interest is supposed to go down then fund managers will transfer the funds to longer duration bonds.
And if the view is that the interest will go up then they will transfer the funds to shorter duration bonds. This helps to get the advantage of capital appreciation.
- Invest as per your Risk Appetite
Risk appetite means how much risk you are ready to take on your money. High risk can earn you high returns. On the other hand, lower risks will give you less but assured returns. So, when you invest in mutual funds allocate funds as per your risk appetite.
If you can take high risk for higher gains then you can invest in equity mutual funds. If you are not so risk-taking person then you can invest in debt funds or liquid funds which carry less risk.
- Diversify Your Portfolio
One of the best ways to reduce the risk in lumpsum investing is through diversification. Mutual fund investments give you the benefit of diversification. Here the money is not invested in a single stock but in stock or assets so their risk is reduced as not all assets or stocks are going to be affected at the same time.
Moreover, in mutual funds, the multiple stocks are aligned in a manner that there is a low or negative correlation. This helps to protect your investment from being affected negatively due to various factors.
- Invest in long-term
When you invest a large amount in a mutual fund, invest it for the long term. This can limit the risk. This is because, in the long term, the fund will have gone through various cycles and reduce the loss due to short-term fluctuations.
Moreover, long-term investing also gives the benefit of the compounding effect. Your profits here are reinvested so you earn higher gains.
- Periodic Monitoring of Portfolio
Investing itself is not enough, you also need to monitor your investments. Have a periodic review of your portfolio. This helps to track the performance of your investment.
You can exit from the schemes that are not giving you enough returns or are giving you loss. And you can invest these funds in another scheme that can give better returns.
You can do this portfolio review half yearly. But if you have investments with multiple goals then you should review the investments frequently.
- Create an Emergency Fund
There are certain risks that are unpredictable and uncertain. That can impact your investments heavily. Take for example an emergency that occurs in your family. In such time you may have to break your investment to deal with this emergency.
To avoid this situation, create an emergency fund by investing in liquid funds. Liquid funds can be redeemed instantly. You will not have to withdraw from your portfolio and disturb your investments.
- Consult an Advisor
Investing has become easy these days. However many people are still unaware of goal-based investing. They still don’t have enough knowledge about investing and financial planning. In such scenarios, it is advisable to take the help of an advisor.
He will understand your risk profile and help you to pick the right funds. He will also assist you in making the right investments depending on various factors like age, income goals etc.
Conclusion
There is always risk involved when you invest a large amount of money in mutual funds. But by following the above tips you can manage these risks and earn higher returns. Invest with specific goals, diversify your investments, and invest for the long term to reduce risk on your investments. You can use a lumpsum calculator to have a rough estimate of your returns
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