TomorrowMakers

Women investors need to remember that higher stakes come with higher risks.

Benefits of lump sum investment

The post-pandemic era has occasioned a change in how women manage and control their finances. Though they are a long way off in terms of achieving parity with men when it comes to financial participation, millions of women are upskilling their financial game and even beating men at the game. Some studies suggest that for each year between 2017 and 2020, women’s investment portfolios have consistently outperformed those of men. 

Today, women have a portfolio as diverse as their male counterparts. From stocks, mutual funds, and portfolio management services to ETFs, alternative assets, and cryptocurrencies, women - especially the younger lot - are equally savvy about capitalising on every wealth generating opportunity.

This raises the question: with increased financial knowledge and resources, should women take a bigger wager on market-linked assets? Unfortunately, there is no straightforward yes-or-no answer to this. The decision to make a lump sum investment will depend on various factors such as the quantum of funds available, one’s risk appetite, asset allocation, and time to maturity.

That said, let’s consider some of the benefits you can expect if you are contemplating making a substantial investment in a product or asset class.

Related: Short-Term Investment Options To Put Your Lump Sum Money To The Best Use

More investment avenues

Lump sum investing is obviously possible only when you have a substantial corpus in hand. This could be a handsome bonus at the workplace, an inheritance, or proceeds from the sale of another asset such as real estate. Having more funds at your disposal opens up the possibility to invest in certain financial products that are not accessible to everyone. 

Sophisticated wealth products such as Portfolio Management Services, Alternative Investment Funds, or Private Equity Funds usually have a minimum investment threshold between Rs 25 lakh and Rs 1 crore. These are highly specialised investment products managed by some of the best fund managers. Such products aim to generate a higher alpha not available through other retail investment options.

Related: SIP Vs Lumpsum Which One Is Right For You To Invest In Mutual Fund?

Rupee-cost averaging/earnings from arbitrage opportunities

If you are an experienced investor and well cued-in to the market, you may be able to capitalise on opportunities and market corrections. Dips in the market give you the opportunity to make a lump sum investment at attractive prices. Entering investments at a lower level allows you to lower your overall cost of purchase and generate higher returns on your capital investment. 

This strategy also works for short-term investors and traders in the stock and commodities market. Women can capitalise on quick arbitrage opportunities on a daily/short-term basis. Even if the percentage gain is low, a high investment value can give you substantial returns in rupee terms.

Higher rate of compounding

When you invest via a systematic route, the monthly instalment is small. So, the actual month-on-month returns may not be high. You do gain from compounding, but your investment also has to tackle imminent volatility. The rate of compounding achieved through lump sum investments - especially before or during the start of a bull run - is significantly higher in comparison.

For example, during the early days of the pandemic (April 2020), the Sensex almost tanked by 40% to about 29,000 points. In the 20 months since, it doubled to 60,000 points. SIP returns on most index-based funds during the same period range between 36% and 38%.

This means a lump sum investment of (say) Rs 10 lakh in an index fund would have become Rs 20 lakh by January 2022, while a monthly SIP of Rs 50,000 would have taken the total capital to about Rs 13.5 lakh, thanks to the consistently higher purchase price as the market scaled up.

Related: How Compounding Helps Early Starters Save More

Last words

Women need to remember that higher stakes come with higher risks. If you are looking to make lump sum investments, it is crucial to vet the decision carefully and stay well-informed at all times on how the investment is performing.