Investors in mutual funds often have a question in their mind whether it is better to invest a large amount at once or invest a small amount every month. Both methods have their own advantages and risks. If you have Rs 5 lakh, you can invest this amount in lump sum. At the same time, if you have regular income, you can also start a monthly SIP of Rs 25,000. But how big of an investment fund can this option create in 20 years? Let us understand through calculations.
Lump sum investment means that you invest your entire amount in a mutual fund at once. In this method, the entire amount remains invested from the beginning and it gets an opportunity to grow in the market for a long time. However, if the market is at a high level at the time of investment and then falls, you may have to suffer losses in the initial years.
Suppose you invest a lump sum of Rs 5 lakh in an equity mutual fund and you get an average return of 12 percent per annum for the next 20 years. In this situation your investment can increase to approximately Rs 48.23 lakh.
In this, your original investment amount will be Rs 5 lakh, while the estimated profit will be around Rs 43.23 lakh. This means that if you maintain the investment for two decades, your initial amount can increase significantly.
Through Systematic Investment Scheme i.e. SIP, you invest a fixed amount in mutual funds every month. There is no need to invest a large amount at once, rather an attempt is made to create a large investment fund in the long run by investing small amounts at regular intervals.
This method can be convenient for people receiving regular salary or income from business. Fund units are purchased at different prices through SIP during market fluctuations, which can help in balancing the average purchase cost of the investment. However, this does not guarantee that you will avoid loss or get a certain return.
Now suppose you start a SIP of Rs 25,000 every month and continue it for 20 years. Your total investment during this period will be Rs 60 lakh. Whereas if you get an estimated average return of 12 percent annually, then your investment corpus can reach approximately Rs 2.49 crore.
In this, the original amount deposited by you will be Rs 60 lakh, while the estimated profit can be around Rs 1.89 crore. In this way, regular investment and the effect of compound growth can create a large investment corpus in the long run.
Now comparing both the options, based on the given estimates, a monthly SIP of Rs 25,000 can create an investment corpus of approximately Rs 2.49 crore in 20 years. At the same time, a lump sum investment of Rs 5 lakh can increase to approximately Rs 48.23 lakh. Thus, there appears to be a difference of around Rs 2 crore in the final price of both.
But it is important to understand one important thing here. The total investment amount is not the same in both these options. In lump sum investment you invest only Rs 5 lakh, whereas in monthly SIP you deposit a total of Rs 60 lakh over 20 years. That means you invest Rs 55 lakh more in SIP. Therefore, it would not be correct to conclude that SIP is better than lump sum investment in every situation just by comparing the final investment funds.
In lump sum investment, the entire amount starts working in the market from day one, whereas in SIP, the money is invested gradually. If the market performs well over a long period of time, investing the entire amount initially may pay off. On the other hand, SIP can help investors with regular income to invest in a disciplined manner and continue investing during market fluctuations.
According to market experts, it is important to understand your financial situation, investment period, risk appetite and financial goals before choosing between lump sum investment and SIP. If you already have a large amount of money available, a lump sum investment can be considered. However, the risk of investing in the market at the wrong time must also be kept in mind.
At the same time, if you receive regular income every month from salary or business and want to build wealth in the long run, then SIP can be a convenient option for you. It is also important to have enough savings for emergency needs and avoid expensive loans before starting to invest.