How to invest lumpsum in index funds? What are the key factors that need to be considered?
Many investors favour index funds as a low-cost, passive investment strategy. An index fund is a portfolio of securities that replicates a particular market index, such as the NSE 50 Index (Nifty) or BSE Sensitive Index (Sensex). By investing in an index fund, you as an investor get access to a diversified pool of stocks which are well-researched and traded, offering the potential for greater stability and risk protection than investing in individual stocks.
A lump sum investment into an index fund allows you to make a large one-time deposit into an investment rather than making regular deposits (systematic investment plan – SIP) over time. This method can be beneficial because it allows you to capitalise on the current market conditions, potentially increasing your profit potential.
How to invest in index funds in India
To invest directly, you can visit one of many official points of acceptance for the fund house and complete KYC formalities. Typically these include filling out a KYC (Know Your Customer) form and submitting some identification documents like your passport or driver’s licence along with proof of address like a utility bill from within the last 3 months. Post verification, you need to complete the required payment for investment.
- Make your investment online using the app
You can also invest lumpsum in index funds through dedicated apps provided by the fund houses. The steps are:
- Open the app
- Go to the index funds
- Select your investment period and funds from the index funds list provided
- Click on the ‘invest’ option
- Choose ‘one-time lump sum’
- Enter the investment amount and click on ‘proceed’
- Enter your PAN number
- Complete basic bank details and OTP (for payment confirmation) and pay for the funds
Note: Index funds can be invested through the fund house’s website in the same way as other mutual funds.
Factors to consider while investing lumpsum in index funds
Your investment period
Index funds can experience significant fluctuations in a short period. These investments are likely to perform better in the long term, so it is important to carefully assess your investment period and evaluate if it’s in alignment with your financial goals. These funds can be particularly beneficial when planning for retirement, children’s higher education, or any other long-term goal.
Maintaining the right balance
Investing a lump sum amount requires a well-prepared strategy, and being solely reliant on index funds may not be the right approach. An optimal portfolio should contain a mix of both actively and passively managed funds – too little active management can mean limited access to potential opportunities, whereas too much can overexpose one’s assets to risk.
Consider index funds with a low tracking error record as it indicates the minimal deviation of actual returns from that of the benchmark. Invest in mutual funds with a proven track record of generating returns that closely mimic their benchmark indices. Evaluating this metric can help you maximise your lumpsum investment in index funds.
Given their passive management style, index funds can help avoid making emotional investment decisions, thereby mitigating the risks. However, to invest a lump sum amount in index funds efficiently, it is important to assess your risk appetite, select suitable funds, calculate the asset allocation accurately and balance across both active and passive index mutual funds depending on your investment goals.