One of the most common problems investors face is whether to commit a fixed amount on a monthly basis through a Systematic Investment Plan (SIP) or invest a large amount at once as a lump sum. While both these mutual fund investment strategies have their merits, the outcomes differ significantly due to market-linked factors and investment horizon.
A lump sum investment could be suitable when you have a large amount to invest. On the other hand, SIPs offer enormous flexibility to build a large corpus with small investments regularly over a longer duration. So, which is the better option: SIP or lump sum? Let's find out.
SIP vs Lump Sum: What To Know?
In simple terms, SIPs allow investors to invest a fixed amount of their hard-earned money into a mutual fund regularly. This investment is usually done every month, on a fixed date chosen by the investor. Also, investors can set up automatic deductions from their bank accounts, ensuring seamless investments without any disruption in SIPs.
A lump sum scheme, on the other hand, allows one to invest a large amount at once, which means that you start getting returns on this amount immediately.
Also Read: Targeting Rs 10 Crore By Retirement? Here's How Much You Must Invest Monthly In SIP
Assuming that a person invests Rs 6,000 in mutual fund SIPs at an estimated return of 12% per annum for five years, here's what the total investment would look like:
- SIP amount: Rs 6,000
- Investment duration: 5 years
- Expected rate of return: 12%
- Invested amount: Rs 3,60,000
- Estimated returns: Rs 1,34,918
- Total value: Rs 4,94,918
On the other hand, if a person makes a lump sum investment of Rs 3 lakh into a mutual fund with similar returns and tenure, then the overall corpus could differ significantly compared to the SIP investments.
- Investment amount (lump sum): Rs 3,00,000
- Investment duration: 5 years
- Expected rate of return: 12%
- Estimated returns: Rs 2,28,703
- Total value: Rs 5,28,703
Also Read: Rs 2,000 For 25 Years Vs Rs 20,000 For 5 Years: Which SIP Gives Better Returns?
As per the above calculation, a lump sum investment could be more rewarding in the given scenario compared to an SIP, with a higher return of nearly Rs 34,000 over a period of five years at an assumed interest rate of 12% per annum.
The overall choice between SIPs and lump sum is not just about numbers. It reflects an investor's risk appetite, investment horizon and financial goals. Understanding the right strategy that performs better over five years can provide investors valuable insights to maximise returns while balancing risk.
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