- Mutual funds offer flexibility and higher returns than traditional investments
- SIP involves regular small investments benefiting from rupee cost averaging
- Lump sum investment is a one-time large amount with potentially higher returns
Mutual funds are gaining popularity among investors due to the flexibility and higher returns compared to traditional investment instruments. In terms of amount and tenure, mutual funds offer enormous options.
Investors can choose a Systematic Investment Plan (SIP) or a lump-sum investment as per the amount in hand and financial goals. But if you are looking forward to accumulating your first Rs 1 crore, let's see which investment mode via mutual funds could be more rewarding.
What Is SIP?
A mutual fund SIP is a simple method of investing small amounts regularly into a scheme. Compounding works its magic even with a small amount of money. It minimises risks due to rupee cost averaging.
What Is A Lump Sum Investment?
A lump sum investment is where you invest a large sum at once. If you want to take all your savings and put them into a mutual fund scheme, that's a lump sum investment. It could be risky, but may offer higher returns if timed well as per the market conditions.
Power Of Compounding
Compounding refers to the fact that the returns or interest you earn on your investment begin earning interest on their own. In other words, the money you gain after the initial period is rolled back into your investment, and during the next period, you earn interest on this larger amount. Over time, this creates a chain reaction where your money keeps growing faster because you are earning returns on both your investment and the returns.
Let's assume an average annual return of 12% from equity mutual funds.
Crorepati Goal: Rs 10,000 Monthly SIP vs Rs 10 Lakh Lump Sum
Rs 10,000 Monthly SIP:
Total Investment: Rs 25,20,000
Tenure: 21 Years
Interest Rate: 12% per annum
Estimated Returns: Rs 88,66,742
Total Corpus: Rs 1,13,86,742
Rs 10 Lakh Lump Sum
Total Investment: Rs 10,00,000
Tenure: 21 Years
Interest Rate: 12% per annum
Estimated Returns: Rs 98,03,848
Total Corpus: 1,08,03,848
Here, both SIP and lump sum investments could help you build a corpus of Rs 1 crore in around 21 years. However, the lump sum investment looks more rewarding, compared to the SIP route, as you get higher returns over an investment of a smaller amount.
So, Which One Should You Consider?
Before choosing between an SIP and a lump sum investment, here's what you need to factor in:
How much you can invest: If you have a large amount ready, a lump sum investment can work well. But if you don't have much to start with, or want to build a habit of saving regularly, an SIP could be a better choice.
Market timing: A lump sum investment tends to give better returns when the market is low. If you're unsure about market cycles, an SIP spreads your investment over time and reduces risk.
In addition, your monthly income, overall financial stability, goals and risk appetite should guide your choice.
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