Rs 12,000 Monthly SIP vs Rs 12 Lakh Lump Sum: Which investment can help you build Rs 6 crore corpus faster?

When an investor makes a lump sum investment in a mutual fund, they buy all the net asset value (NAV) at the same rate, so compounding in all NAVs is equal. The price of all NAVs will remain the same whether they rise or fall.

In SIP, you invest periodically. If you want to invest Rs 40 lakh, it won't be in one go. It can be in the form of a monthly investment. So you purchase NAVs at different rates in different periods. 

Every new SIP goes through the different investments and compound growth. So growth can be highest in the oldest SIP and the lowest in the newest SIP. However, in the long term, all rates average out, and the investment risk mitigates.

Let's see if we want to invest Rs 20 lakh in a mutual fund scheme where the annualised return is 12 per cent, let's see how the corpus can grow in 20 years. At a 12 per cent annualised return, estimated capital gains will be Rs 1,72,92,586 and the estimated corpus will be Rs 1,92,92,586.

Now, we want to invest the same amount, Rs 20 lakh, through SIP in the same mutual fund at a 12 per cent annualised return for 20 years, where our monthly SIP amount will be Rs 8,333.  In 20 years, the total investment will be Rs 19,99,920, estimated capital gains will be Rs 56,65,251, and the estimated corpus will be Rs 76,65,171.

The investment amount in both cases is nearly the same, but the estimated corpus generated in the lump sum investment is higher because one is investing the entire amount in one go and is getting compounding on the entire amount.

The power of compounding will work in both types of investments – SIP and lump sum. However, its impact will be more significant in the long term. See a comparison of returns from a Rs 2,00,000 investment at a 12 per cent annualised return for 20 years and 40 years. 

In 20 years, estimated capital gains will be Rs 17,29,259, and the estimated corpus will be Rs 19,29,259. In 40 years, estimated capital gains will be Rs 1,84,10,194, and the estimated corpus will be Rs 1,86,10,194.

Now, see how a Rs 2,000 monthly SIP investment will grow at a 12 per cent annualised return in 20 and 40 years. In 20 years, the total investment will be Rs 4,80,000, estimated capital gains will be Rs 13,59,715 and the estimated corpus will be Rs 18,39,715. In 40 years, the total investment will be Rs 9,60,000, estimated capital gains will be Rs 1,86,26,142 and the estimated corpus will be Rs 1,95,86,142.

We will compare two investments- Rs 12 lakh sum and a Rs 12,000 monthly SIP – and see which of the 2 can create a faster route to generate a Rs 6 crore corpus.

It will take an estimated 35 years to reach the Rs 6 crore retirement corpus target. In those years, estimated capital gains will be Rs 6,21,59,543 and the estimated corpus will be Rs 6,33,59,543.

In the SIP investment too, it will take an estimated 35 years to touch the Rs 6 crore corpus target. In those years, the total investment will be Rs 50,40,000, estimated capital gains will be Rs 6,10,89,974, and the estimated corpus will be Rs 6,61,29,974.

Though the duration to reach in both cases is the same, in case of SIP, the total investment is much higher because in a lump sum, the compounding on the entire Rs 12 lakh corpus is from Day 1, while in SIP, the investor gets compounding only on the periodic invested portion.