One of the primary ways investors make money is by selling their investments at a price significantly higher than at the price they bought them. This is why the golden rule of investing is to buy low and sell high. Naturally, many investors think about investing lumpsum in mutual funds when the markets are down. Since 2020, first due to the pandemic and now due to geopolitical tensions, the markets have been extremely volatile. So, if you too have been thinking about making a lumpsum investment in mutual funds, read on to know if that’s the right decision.
What to consider when the markets are down
- The funds that you are looking to invest in lumpsum, are these the funds that you will require in the short term? If yes, then this may not be a prudent choice for you. You should only look at making lumpsum investments in equity mutual funds when your investment horizon is long, about seven to 10 years. If you do have money that you can invest for that long, then you can consider making a lumpsum investment. You can also use a lumpsum calculator to figure out how much amount you should invest.
- You need to decide how you will identify a market correction. As per the general standards, a decline of 10% or more is considered a correction. However, individual investors have their own standards for when they will make the move of investing more in the market or opting for lumpsum investments. For some, it could be 5%, for others 15%. Hence, you need to decide your target beforehand. The thing to remember is that nobody can accurately time the market or predict just how low the markets will go.
- Even when you decide to make lumpsum investments in mutual funds during a market downturn, you should do so according to your risk appetite. For instance, if your risk appetite is on the conservative end, then you should consider sticking to funds like large-cap funds. On the other hand, if your risk appetite is on the higher end, you can look at funds like flexicap funds. The point is to stick to your overall portfolio’s asset allocation strategy and make investments that align with your goals and risk tolerance.
The bottom line
The important thing to remember is to not be swayed by the overall market sentiment and avoid deterring from your investment strategy. As long as you are clear about your financial goals, risk appetite, asset allocation strategy, and investment horizon, you can consider making lumpsum investments in mutual funds during a market correction to benefit from it. Also, you should not stop your ongoing SIP investments in order to make a lumpsum investment. You can consider doing both since your lumpsum investment will anyway be a one-time thing whereas your SIP investment is long term.
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