Mutual funds are becoming an increasingly popular way to accumulate long-term wealth. There are two common ways to invest in mutual funds: systematic investment plan and lump sum.
A SIP allows investors to invest a fixed amount at regular intervals. It promotes discipline and reduces the impact of market volatility. On the other hand, a large one-time lump sum investment can help investors gain higher returns. This is because it allows a high compounding due to an initial boost in base investment. However, it carries higher risk due to market timing.
While both methods have their own advantages, they react differently over the years due to a combination of factors such as market volatility, timing of investment, risk appetite and other things.
Over 20 years, investors may be able to see significant differences in returns, depending on whether they invest through SIPs or lump-sum investments.
Also Read | Here's How A Simple One-Year SIP Pause Could Cost You Rs 25 Lakh
Assuming someone invested a one-time lumpsum of Rs 1 lakh into a mutual fund versus they chose to keep a monthly SIP of Rs 2,000 over 20 years, here's what their corpus may look like:
Rs 2,000 SIP:
SIP amount: Rs 2,000
Investment duration: Rs 20 year
Expected rate of return: 12%
Invested amount: Rs 4,80,000
Estimated returns: Rs 15,18,295
Total value: Rs 19,98,295
Rs 1 lakh Lump Sum:
Investment amount: Rs 1,00,000
Investment duration: 20 year
Expected rate of return: 12%
Invested amount: Rs 1,00,000
Estimated returns: Rs 8,64,629
Total value: Rs 9,64,629
The above calculation shows that over 20 years, even though the lump-sum value is only about one-fifth of the SIP investment, it still generates nearly half the total corpus. This is mainly because the higher initial investment allows the lump sum to benefit more from long-term compounding. On the other hand, a disciplined, consistent SIP approach is also beneficial, allowing investors to accumulate nearly five times wealth over two decades.
Choosing between SIP and lump sum should be based on individual financial goals, risk tolerance, market conditions and other aspects. Hence, it is always recommended to discuss the financial goals with a certified expert to avoid any stress.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
