Mutual fund investments continue to gain popularity in India, evident from the record high systematic investment plan (SIP) inflows. There are popular ways of investing in mutual funds: SIP and lump sum.
Investors can pick a SIP plan, which typically requires them to invest a fixed amount every month. This amount is managed by their selected fund house based on the fund type and market conditions. Lump sum investments are a one-time-payment option, where investors choose to pay a certain amount into a mutual fund, allowing it to grow over time.
SIPs are beneficial as they help in rupee cost averaging and reduce the impact of market volatility. It is suitable for those who prefer disciplined and long-term investing. Lumpsum investment can generate higher returns if the market is favourable but carries higher risk, particularly for a short term investment outlook.
Over the long-term, both of these investment types can benefit from compounding returns and disciplined growth. This helps investors build substantial wealth over a longer duration.
To analyse which investment type could be more beneficial in the long-term, we can also compare their returns over 10 and 15 years. This would help in understanding how the power compounding impacts investments since it's influenced by the overall investment period.
If someone wanted to do Rs 12 lakh lump sum investment or carry on with Rs 12,000 monthly SIP, here’s how they could grow.
Over 10 Years:
SIP:
SIP amount: Rs 12,000
Investment duration: 10 years
Expected rate of return: 12%
Invested amount: Rs 14,40,000
Estimated returns: Rs 13,48,068
Total value: Rs 27,88,068
Lumpsum:
Investment amount: Rs 12,00,000
Investment duration: 10 years
Expected rate of return: 12%
Invested amount: Rs 12,00,000
Estimated returns: Rs 25,27,017
Total value: Rs 37,27,017
Over 15 years:
SIP:
SIP amount: Rs 12,000
Investment duration: 15 years
Expected rate of return: 12%
Invested amount: Rs 21,60,000
Estimated returns: Rs 38,94,911
Total value: Rs 60,54,911
Lumpsum:
Investment amount: Rs 12,00,000
Investment duration: 15 years
Expected rate of return: 12%
Invested amount: Rs 12,00,000
Estimated returns: Rs 53,68,278
Total value: Rs 65,68,278
In case of a 10 year-investment period, the SIP value exceeds the lumpsum but still offers lower returns. This is mainly because a higher initial investment value in lumpsum helped the fund attract higher gains since the start, which further boosted the power of compounding.
The real impact of the power of compounding is visible in a 15-year period, when the SIP contribution jumps to nearly double compared to the lump sum, but still offers lower returns. This shows that the power of compounding grows stronger with time.
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