By Sandeep Bhosle
Perhaps you received a bonus from your employer or an unexpected raise for a job well done during these difficult times. Or perhaps you landed a few remote projects that resulted in a sudden lumpsum amount in your bank account.
Now as your daily expenses are taken care of, you do not need to worry about those. But what should you do with this sudden surplus amount that you have got? Those online sales promotions may urge you to go on a pointless shopping spree, but they do not faze you much. As a disciplined investor who wants to create wealth for the long-term need, it is important to know how to invest your hard earned money so that it gets the compounding benefit over the long term. Staying invested for a long term in equity-related instruments can help an investor to grow his corpus.
What to do with surplus money?
Invest your surplus money into a wealth creation avenue. Systematic investment plans (SIPs) are an excellent way to invest in mutual funds. Lumpsum investing is the second strategy and may prove to be quite useful, especially if you are not sure of being able to make monthly SIP payments consistently for the long term.
Let us say you want to achieve a goal of Rs 20 lakh in five years. So, if you were to start a SIP, you will need to invest Rs 25,000 per month for five years to achieve your goal. But what if you wanted to invest a lumpsum now instead of starting a SIP? You would need to invest Rs 11.84 in lumpsum today across various funds to achieve that goal. You need to simply park this amount for five years.
Which method is better?
This choice between SIPs and lumpsums completely depends on the investor and his cash flow. Some may find a monthly investment of Rs 25,000 through a SIP more palatable compared to nearly Rs 12 lakh one-time investment to build a corpus of Rs 20 lakh after five years. The choice of investing depends on the investor’s preference and future earning capacity.
Before starting a SIP, an investor must consider his future earning potential. If he thinks that he will definitely have a monthly income from his job or business for the next five years, it may not be so. As the Covid-19 pandemic has shown, a salary is no longer a dependable stream of money as many employees have seen salary cuts and even job losses.
We never know what life may hand to us- job losses, retirement, health issues and caring for your family. There may be many reasons that your earning potential may decline, but that does not mean you nvestor make a hasty decision regarding your investments. In fact, investors sometimes panic and make poor investment decisions during uncertain events such as the current Covid-19 pandemic situation, redeeming their investments from equity mutual funds.
Most investors redeem or pause their SIPs and exit their equity investment plans well before the time-frame is completed. Not only are they unable to realise their financial goals, they also become disillusioned in the process as they lose out on the returns for not staying invested for a long-term. This is why investors can consider lumpsum investments, too. Next time you get that bonus, be the smart investor. Consider your options well and invest to create wealth for the long-term.
The writer is AVP, Customer Interaction, Quantum Mutual Fund