While interest in mutual fund investments is rising among Indian investors, its execution remains a challenge for many people. Investors often feel confused about whether a Systematic Investment Plan (SIP) or a lump sum is the better option. As a result, financial planning can become complicated and stressful.
The same investment amount can deliver very different outcomes through SIPs or lump-sum investments. This difference depends on several factors, including market conditions, timing of entry, risk appetite and investment horizon.
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SIPs have the advantage of disciplined investing and help reduce the impact of market volatility. On the other hand, lump-sum investments may deliver higher returns if invested at the right time. They also carry greater risk due to market timing.
How Big This Difference May Be
SIP After A Year
SIP amount per month: Rs 10,000
Investment duration: 1 year
Expected rate of return: 12%
Invested amount: Rs 1.2 lakh
Estimated returns: Rs 8,093
Total value: 1,28,093
Lumpsum After A Year
Investment amount: Rs 1,20,000
Investment duration: 1 year
Expected rate of return: 12%
Invested amount: Rs 1,20,000
Estimated returns: Rs 14,400
Total value: Rs 1,34,400
It can be seen that the power of compounding has worked better in the lump-sum investment, as the entire amount remained invested for a longer period. This allowed returns to compound on a higher base.
While the impact on short term investment may not be significant, it is more visible in the long-term.
ALSO READ | Step-Up SIP: Why Does It Make Sense In Current Volatile Market Conditions?
SIP after 3 years
SIP amount: Rs 10,000
Investment duration: 3 year
Expected rate of return: 12%
Invested amount: Rs 3,60,000
Estimated returns: Rs 75,076
Total value: Rs 4,35,076
Lumpsum After 3 Years
Amount: Rs 1,20,000
Investment duration: 3 year
Expected rate of return: 12%
Invested amount: Rs 3,60,000
Estimated returns: Rs 93,519
Total value: Rs 4,53,519
The maths shows that lump-sum investments may turn out to be more beneficial in favourable market conditions in the long-term. However, one should always consider factors such as risk tolerance, market volatility and personal financial goals before choosing this route. This is why it is always recommended to consult with a financial expert before making significant commitments in investments.
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