Thinking of investing in mutual funds but confused about which method to choose? Well, there are two ways to invest in mutual funds. One is a systematic investment plan (SIP), and the other is a lump sum investment, also called a one-time investment. While both can create long-term wealth, the final amount depends on market timing and the power of compounding, among other factors. In this article, we will understand the difference between SIP and lump-sum investment and calculate which method can make more money in 20 years if you invest Rs 10,000 monthly in a SIP or make a 10 lakh lump-sum investment. Take a look:
Difference between SIP and lump sum investment
In SIP, investors can put a fixed amount in mutual funds regularly. Usually, investors invest monthly. Because investments are done in installments, they are spread across different market levels and benefit from rupee cost averaging.
On the other hand, in a lumpsum investment, investors invest a large amount in one go. The final corpus depends on the market timings. If the market is low at the time of investment, it can generate attractive returns; however, if the market declines just after the investment, you may suffer losses for a short period.
1- Rs 10,000 SIP for 20 years
Monthly investment: Rs 10,000
Investment period: 20 years
Total investment: 24,00,000
Total value: Rs 91,98,574
2- Rs 10,00,000 lump sum investment for 20 years
Total investment: Rs 10 lakh
Investment period: 20 years
Total value: Rs 96,46,293
In the above examples, we can see that a lump sum investment can make more money if invested for the same time as SIP. It is because a big amount is invested in one go. The total investment is also less in this method.
The expected rate of return is 12 per cent in both SIP and lump sum investment.
FAQs
SIP vs lump sum investment; which one is better?
It depends from person to person and their financial situation. SIPs are better for regular income earners, while lump sum or one-time investment is best who have a large amount to invest
Can I get better returns if I choose SIP over lump sum investment?
No, it is not necessary to get better returns in SIPs. Since these investments are linked to the market, investment timing matters.
What is rupee cost averaging?
It means you buy more mutual fund units when the market is down and fewer units when the market is up. It helps average out your purchase cost over a period of time.
Is it possible to convert a lump sum into SIP?
Yes, it is possible. You can use the amount you want to invest in a lump sum to invest in an SIP instead.
Our calculations are projections and not investment advice. Do your own due diligence or consult an expert for financial planning.