How Rs 10,000 monthly SIP and Rs 2 lakh lump sum investments can generate Rs 4.13 crore corpus; understand it through calculations
Power of Compounding: In Systematic Investment Plan (SIP), an investor invests a fixed amount every investment cycle that can be daily, weekly, monthly, etc. In lump sum investment, mutual fund investors make a one-time investment. Both investment methods provide compounding and can help create a sizeable corpus in the long run.
Power of Compounding: Systematic Investment Plan (SIP) and lump sum are two methods to invest in a mutual fund scheme. In SIP, one makes systematic investments periodically, while in a lump sum, the investor can invest the entire amount in one go. While SIP is suitable for investors who depend on a monthly income cycle, lump sum is suitable for investors who want to park their large amount in a mutual fund scheme and want to benefit from its returns. Both options provide compound returns.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What is compound return?
Compounding is return on return, where you get return not only on the principal amount but also on the growth achieved on it. As a result, the corpus increases faster as the investment gets older. The one who starts investing early and does it for a long period gets a higher profit compared to a late beginner who invests for a short duration with a larger amount.
Compounding in SIP investment
When one invests a fixed amount through SIP in a mutual fund, they purchase net asset value (NAV) units of that scheme. Since the price of the NAV keeps changing, the investor buys different amounts of NAVs every investment cycle. In a high market, when the NAV price is also high, they buy fewer NAVs, while in a low market, when the NAV is available at a cheaper rate, the investor purchases more.
Compounding in SIP investment
The difference between the prices of NAVs is known as rupee cost averaging. As time passes, the investor has multiple buys of NAVs at different rates. The more the difference between the prices of NAVs increases, the higher is compounding.
Compounding in lump investment
In a lump sum investment, the investor purchases NAVs in a mutual fund scheme. As the value of stocks the fund has increases, the price of NAV increases. The investor gets the return on the principal and the increased value. In the long run, this increase is more significant.
Benefits of SIP investment
One can choose the investment amount as per their income. Many funds start investments with Rs 100 SIP. An investor can stop SIP and restart whenever their investment capacity allows it. They can opt for a step up SIP where they can increase their SIP investment amount every six months or yearly. With SIP investment, one doesn't need to time market since they purchase NAVs at different rates.
Benefits of lump sum investment
Lump sum investment, specially in equity funds, is not recommended when the market is up. However, during the down market, one can make a lump sum investment in an equity mutual fund and may benefit from the rise after it.
Benefits of lump sum investment
However, the lump sum investment can be an effective tool in the long run since the investor gets return on the entire amount, and market fluctuations are likely to show less impact on the lump sum investment in the long run.
Calculations for lump sum and SIP investment
We will calculate returns on Rs 2 lakh lump sum and Rs 10,000 monthly SIP investments in 10, 20, and 30 years. The rate of return will be 12 per cent annualised.
Corpus from Rs 2 lakh lump sum & Rs 10,000 monthly SIP investments in 10 years
The estimated corpus from the Rs 2 lakh lump sum investment will be Rs 6,21,170, while the Rs 10,000 monthly SIP investment will grow to Rs 23,23,391, so the overall corpus will be Rs 29,44,561.
Corpus from Rs 2 lakh lump sum & Rs 10,000 monthly SIP investments in 20 years
In 20 years, the lump sum investment will swell to estimated Rs 19,29,259, while the estimated SIP investment corpus in 20 years will be Rs 99,91,479.
The total amount will be Rs 1,19,20,738.
Corpus from Rs 2 lakh lump sum & Rs 10,000 monthly SIP investments in 30 years
The Rs 2 lakh lump sum investment in 30 years will become estimated Rs 59,91,984, while the Rs 10,000 monthly SIP investment will grow to estimated Rs 3,52,99,138.
The overall estimated corpus will be Rs 4,12,91,122.