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.
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.
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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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