When it comes to long-term investing, one of the most common dilemmas is whether to invest through a systematic investment plan or deploy a large lump sum amount at once. To understand which approach can create more wealth over two decades, it is important to compare how both strategies work and the factors that influence returns.
How Rs 20,000 SIP Works
An SIP allows you to invest a fixed amount, in this case Rs 20,000, every month into a mutual fund. Over 20 years, your total invested amount would be Rs 48 lakh (20,000 x 12 months x 20 years). Assuming an average annual return of 12%, a well-chosen equity mutual fund could grow this investment to around Rs 1.84 crore
The SIP calculator uses the following formula:
M = P × ({[1 + i]^n – 1} / i) × (1 + i)
In the formula:
M is the maturity amount you will receive.
P is the fixed amount invested at regular intervals.
n is the total number of instalments.
i is the periodic rate of interest.
The main advantage here is rupee-cost averaging. Your money buys more units when markets are low and fewer when markets are high, reducing the risk of poor market timing. SIPs also encourage disciplined investing and work well for those with regular income.
How Rs 20 Lakh Lump Sum Works
Now, lets assume you invest Rs 20 lakh at once in a mutual fund. Investing Rs 20 lakh for 20 years at the same at 12% annual return would grow to about Rs 1.93 crore.
The formula here is :
A = P (1 + r/n) ^ nt
Where:
A is the estimated return or the amount you'll have at the end of the investment period.
P is the present value or the initial amount invested.
R is the Annual rate of return (in decimal form).
T is the duration of the investment in years.
N is the number of times the interest is compounded each year.
The power of compounding works strongly here because the entire amount starts earning returns immediately. But there is a risk too. The risk is market timing. If you invest the full amount just before a major market correction, the portfolio might take years to recover. Lump sum investing is better suited when markets are fairly valued and you can tolerate short-term volatility.
In conclusion, SIP suits those who prefer a steady approach and may not have large cash reserves to invest upfront. A lump sum can generate higher wealth if invested during favourable market conditions and if you can remain invested for the entire period without panic-selling.
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