Today, there are two great options for long-term investment: the first is a fixed deposit (FD), and the second is a lump sum. While an FD offers safe and guaranteed returns, a lump sum investment can prove to be many times more profitable in the long run. But the biggest question is: which will make you a millionaire first with an investment of ₹2 lakh: a fixed deposit or a lump sum? Let’s understand the math in detail.
What is a lump sum investment
A lump sum simply means a lump sum or a collective investment. When you invest your entire amount in a mutual fund or the stock market all at once, it’s called a lump sum investment. There’s no need to deposit money in installments. Imagine you have ₹2 lakh and you invest the entire amount in an equity mutual fund. The returns depend on the market. If the market performs well, returns can be several times higher than FDs, often up to 15% or more. Lump sums carry a higher risk because they are linked to the market, but offer greater liquidity.
What is a Fixed Deposit
Fixed deposits are a traditional and safe investment method in which you deposit a lump sum amount in a bank or post office for a fixed period. FDs offer a fixed interest rate, typically between 7 and 8.50 percent. They are considered the safest investment because returns are guaranteed, but these returns are very limited. FDs carry much lower risk, but premature withdrawals may incur penalties.
Which will make you a millionaire first
There’s a huge difference between the timeframe for becoming a millionaire with FDs and lump sums.
FD Calculation:
Suppose you opened an FD of ₹2 lakh, earning an interest rate of 8% per annum. At the rate of compound interest, it would take approximately 51 years for your ₹2 lakh investment to become ₹1 crore. This is completely safe, but the rate of returns is much slower.
Lump Sum Calculation:
A lump sum investment can make you a millionaire in less than half the time of an FD. If you invest ₹2 lakh in a mutual fund and earn a 15% annual return (which is possible in equity funds over the long term), your ₹2 lakh fund will become ₹1 crore in less than 28 years. In the long term, a lump sum can yield returns up to three times higher than an FD; this is the tremendous power of compounding.
Where should you invest
Investment experts advise that investment decisions depend on your risk appetite and goals. If safety is your priority and you don’t want to take on too much risk, an FD is a better and reliable option. However, if you want to build significant wealth over the long term and have the ability to withstand market fluctuations, a lump sum investment is far more beneficial than an FD. Building a large corpus requires high returns, which is only possible in the equity market through lump-sum investments.
