Mutual funds are becoming increasingly popular for long-term wealth accumulation. There are two common ways to invest in mutual funds: SIP and lump sum.
SIP helps investors invest a fixed amount at regular intervals. It increases investment discipline and reduces the impact of market volatility. On the other hand, a large lump sum investment can help investors earn higher returns. This is because it initially offers the opportunity for high compound growth due to the growth of the base investment. However, it carries higher risk due to market timing.
While both methods have their own advantages, they tend to react differently over the years due to a combination of market volatility, investment timing, risk appetite and other factors.
Over a period of 20 years, investors may be able to see significant differences in returns depending on whether they invest through SIP or lump sum.
Let’s assume that if someone invests a lump sum of Rs 1 lakh in a mutual fund instead of depositing Rs 2,000 monthly in a SIP for 20 years, what would be their capital amount:
Deposit Rs 2,000 monthly in a SIP for 20 years:
SIP amount: Rs 2,000
Investment period: 20 years
Expected rate of return: 12 percent per annum
Investment amount: Rs 4,80,000
Estimated return: Rs 15,18,295
Total value: Rs 19,98,295
One-time investment of Rs 1 lakh:
Investment amount: Rs 1,00,000
Investment period: 20 years
Expected rate of return: 12 percent per annum
Investment amount: Rs 1,00,000
Estimated return: Rs 8,64,629
Total value: Rs 9,64,629
Above The calculations show that over 20 years, even though the lump sum is only one-fifth of the investment in a SIP, it still makes up almost half of the total fund. The main reason for this is that the higher initial investment helps the lump sum to benefit more from long-term compounding. On the other hand, a disciplined, consistent SIP approach is also beneficial, helping investors accumulate wealth almost five times over two decades.
Choosing between an SIP and a lump sum should be based on personal financial goals, risk tolerance, market conditions and other aspects. Therefore, it is always advisable to discuss financial goals with a certified expert to avoid any stress.