Many investors wonder whether investing a large amount upfront or spreading the same investment through SIPs creates more wealth. In such a case, let’s check how your corpus grows for both approaches when the total investment, duration, and expected returns remain identical. Her’s a comparison
What is lump sum investment?
A lumpsum investment is a strategy where you invest a single, large sum of money all at once, rather than breaking it up into smaller, periodic payments. It is commonly used when you receive a financial windfall, such as a bonus, inheritance, or large accumulated savings.
What is SIP investment
A Systematic Investment Plan (SIP) is an investment method where you regularly contribute a fixed, usually small amount of money into mutual funds. It automates your investments, allowing you to build wealth over time without the need to time the market
Key things to consider:
- Frequency: You choose to invest a fixed sum on a daily, weekly, monthly, or quarterly basis.
- Automation: The money is typically auto-debited from your bank account.
- Unit Allocation: With every installment, you are allotted a specific number of mutual fund units based on the fund’s prevailing Net Asset Value (NAV) on that day.
Now, let’s see whether a lump sum investment or a SIP can create a larger corpus when the total amount invested is the same. In one case, the entire amount is invested upfront as a one-time investment, while in the other, the same amount is deployed gradually through regular SIP instalments over the investment period.
Scenario A
Suppose your fixed deposit (FD) matures and you receive ₹10 lakh as the maturity amount. Instead of reinvesting it in another FD, you decide to invest the entire amount in a mutual fund
Scenario B
In the second scenario, you choose to invest ₹10,000 every month through a Systematic Investment Plan (SIP) as your salary comes in.
In both the cases, you invest for 100 months or 8.3 year and let’s assume that in both cases the rate of return is 12%. Accorrdingly:
SIP:
SIP amount: ₹10,000
Investment duration: 8.3 year
Expected rate of return: 12%
Invested amount: ₹ ₹ 10,00,000
Estimated returns: ₹7,21,862
Total value: ₹17,21,862
Lumpsum:
Investment amount: ₹10,00,000
Investment duration: 8.3 year
Expected rate of return: 12%
Estimated returns: ₹15,71,285
Total value: ₹25,71,285
When to pick up SIP and lump sum?
A lump-sum is more suitable when you have a large amount ready to invest, such as an FD maturity, bonus, or inheritance, and have a long investment horizon. SIPs, on the other hand, are generally better for salaried individuals who invest gradually from their monthly income.