With rising income levels in India, many people find themselves with a large lump sum of money, either through an inheritance, sale of assets, bonuses or other windfalls. The question then arises – how to make the best use of this sudden influx of funds through judicious investing? Rather than splurging or letting the money sit idle in a bank account, a smart one time investment plan can generate good returns over the long run. This article explores the various options available to design an intelligent investment strategy centered around key principles of asset allocation, risk management and maximizing returns.
Assess your financial situation and investment objectives before deciding on asset allocation
The first step is to take stock of your current finances, future goals and risk appetite. This will guide allocation between debt, equity, gold and real estate. Conservative investors may prefer a higher share in fixed income, while those willing to take on more risk can opt for equities. Diversification across asset classes ensures stability in case some investments underperform. Parking a large lump sum amount in a bank FD may seem safe, but will lead to erosion of purchasing power over the years due to inflation. The sweet spot is getting the asset mix right for your investment horizon and objectives.
Don’t put all your eggs in one basket – smart allocation is key
The old adage ‘Don’t put all your eggs in one basket’ holds true when investing a large one-time amount. Being overexposed to just stocks or just real estate increases overall portfolio risk. You want to spread your capital around wisely. For instance, some percentage can be set aside in fixed deposits for emergency needs and another portion in gold or sovereign bonds for safety. The remaining capital can be allocated across equity mutual funds focused on different market cap segments, individual blue chip stocks and some in high quality REITs or rental property.
Take advantage of instruments offering tax benefits for long term growth
Certain investment avenues like PPF, ELSS mutual funds and ULIPs offer tax deductions u/s 80C of the Income Tax Act, while equity and debt funds provide indexation benefits if held for over 3 years. Real estate also allows tax savings on interest and principal repayment. Savvy investors leverage these tax perks by aligning investments with time horizon and goals. For instance, PPF offers guaranteed returns so ideal for 15 year target needs, while ELSS works for retirement kitty over 10-15 years. ULIPs build life insurance cover along with market-linked returns.
Don’t try to time the market – adopt Systematic Investment Plan instead
History shows that trying to predict market tops and bottoms is futile. A better approach is to stagger or spread your investments systematically over a period of time through SIPs or STPs. This averages out the purchase cost, takes emotions out of investing and mitigates timing risks by buying more units when market falls. For large lumpsum amounts, a SIP over 12-24 months in high quality mutual funds is prudent rather than investing all at once based on market outlook.
In summary, design an intelligent one time investment plan by assessing your needs, allocating assets wisely, taking advantage of tax breaks and investing systematically for the long term. This will ensure you make the most of windfall money through disciplined investing rather than impulsive financial decisions.