Invest your surplus money to create wealth for the long term

 Perhaps you received a bonus from your employer or an unexpected raise for a hob 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 Plan (SIP) are an excellent way to invest in mutual funds. Lumpsum investing is the second strategy and may prove t 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 $20 lakh in 5 years. So, if you were to start a SIP, you will need to invest $25,000 per month to achieve your goal. But what if you wanted to invested a lumpsum now instead of starting a SIP? You would need to invest $11.84 lakh in lumpsum today across various funds to achieve that goal. You need to simply park this amount for 5 years.

Which method is better?

This choice between SIP and lumpsum completely depends on the investors and his cash flows. Some may find a monthly investment of $25,000 thought a SIP more palatable compared to nearly $12 lakh one time investment to build a corpus of $20 lakh after 5 years. The choice of investing depends on the investors 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 5 years, it may not be so. As the COVID-19 pandemic has shown, a salary is no longer a dependable stream of money as money 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 investor make a hasty decision regarding your investments. In fact, investors sometimes panic and make poor investment decisions during uncertain events such as current COVID-19 pandemic situation, redeeming their investments from equity mutual funds. Most investor redeem or pause their SIP and exit their equity investment plans well before the time frame is completed. Not only are they unable to realize 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 investment too. Next time you get that bonus, be the smart investor. Consider your options well and invest to create wealth for the long term.