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Should I invest a lump sum or regular amounts in a unit trust fund? | Smart About Money
Key takeaways
- You can invest bigger sums of money irregularly – a lump sum – or smaller regular monthly amounts.
- Unit trust companies and investment platforms set minimum investment amounts depending on whether you are investing directly with the unit trust management company or through a platform.
- Investing regularly creates a savings habit.
- Investing regularly does not mean you cannot stop your investment if your circumstances change and you can no longer continue.
- Investing regularly means the cost of buying units in a fund is averaged out over time.
- If you need to invest a lump sum but are worried that financial markets are volatile (going up and down), you can divide it into smaller amounts and phase it in over a longer period.
You can choose whether you want to invest irregular sums – a lump sum – of money in a unit trust fund, or, if you want to contribute smaller regular amounts by way of a monthly debit order.
You need to be aware of the minimum investment amounts for your chosen fund or funds and/or the investment platform you are using.
The benefit of investing regularly is that it creates a savings habit and you are less likely to notice the smaller amounts you sacrifice to save for your goal.
Committing to a regular debit order does not prevent you from stopping your unit trust investment at any time if you can no longer afford your monthly investment amount. You should, however, try not to use any excuse to stop your regular debit order, as you are only denying yourself the opportunity to reach your savings goal.
Investing regularly smoothes out values
If you invest regular amounts monthly, the fluctuating value of the units in the portfolio is smoothed out over the period for which you invest. Referred to as rand-cost averaging, this approach prevents you from trying to time the markets with one large lump sum. You will end up buying low in some months when shares and bonds and other securities are cheap and high in others, but ultimately you will achieve a “rand-cost” average.
The most successful investment strategy is still time in the market, rather than timing the market. Many have tried their hand at timing the market, and most have failed, destroying a lot of their investment portfolios' value in the process.
If you are investing a large lump sum, you can phase it in to a fund and the markets in which that fund invests by breaking up the large sum into smaller investment amounts – subject of course to the investment minimums. This is helpful when markets are volatile.
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If you commit to investing a regular amount in a unit trust fund within a retirement annuity (RA) fund, you may be able to stop regular contributions without any penalties and restart them later. But some RA policies, particularly older ones, require you to sign a contract to commit to saving a regular amount. Breaking that contract may incur a penalty on your savings. Check before you sign up for the policy or, if you have already, before you stop contributions. |
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