Rs 10 Lakh Lump Sum vs Rs 10,000 SIP: Which can be faster route to reach Rs 5,00,00,000 corpus?
Rs 10 Lakh Lump Sum vs Rs 10,000 SIP: Lump or systematic investment plan (SIP) investment? Which can generate a higher corpus in the long run. In a lump sum investment, you get compounding from the entire corpus from Day 1. In SIP, compound growth is different for different periodic investments. So, which will create a Rs 5 crore corpus faster- a Rs 10 lakh lump sum or a Rs 10,000 monthly SIP investment?
Rs 10 Lakh Lump Sum vs Rs 10,000 SIP: Many mutual fund investors who have a large sum invest through the lump sum method. However, most prefer the systematic investment plan (SIP) method because it suits their earning cycle. Investors, however, get compounding on both investments. In a lump sum, they get compounding on the entire amount from Day 1, while in an SIP, compounding is the highest in the earliest investment. But a question that strikes the mind of most investors is which of the 2 can create a higher corpus in the long term – lump sum or SIP? Similarly, which of the 2 can be a quicker path to achieve a Rs 5,00,00,000 corpus – a Rs 10 lakh lump sum investment or a Rs 10,000 monthly SIP? Both investments will grow in different ways. Results may surprise you-
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How lump sum investment grows
When you make a lump sum investment, compound growth on the entire growth starts from Day 1. E.g., if you have purchased NAVs at Rs 20, all NAVs will grow at the same pace. Even if there is a market dip, the pace of NAVs' decline will be the same.
How SIP investment grows
In a SIP investment, you purchase NAVs at different rates every investment cycle and in different market conditions, so the growth rate in just 1 cycle is the same for all NAVs, but in the long term, it is different for NAVs purchased in different cycles.
Is lump sum investment suitable for short term?
Many mutual fund investors start their investment when the market is rallying and returns are high. But a rising market may fall due to many reasons such as geopolitical conditions, government policies, global economic conditions, sectoral downfall, etc. So, in the short term, even a well-performing lump sum investment can decline. It is suitable for the long term since it is historically proven that the market mostly performs well in the long term.
Is SIP investment suitable for short term?
When the share market is rallying, equity funds can give returns as high as 70 per cent or more. But if there is some sudden market downfall, the same rising funds can give negative returns within a few weeks. Though SIP provides cost-averaging for your investment, it is always better to consider SIP investment for the long term.
Example of lump sum investment
See how a long-term investment can help achieve a financial goal in the long term. Take the example of a Rs 5 lakh investment and how it can generate a Rs 2 crore corpus in the long run at a 12 per cent annualised return.
It can be created at an estimated duration of 33 years. What is interesting is if one stays in their investment for 7 more years, the estimated corpus will be more than Rs 4.65 crore.
Example of lump sum investment
In 33 years, estimated capital gains will be Rs 2,05,45,767, and the estimated corpus will be Rs 2,10,45,767.
In 40 years, estimated capital gains will be Rs 4,60,25,485, and the estimated corpus will be Rs 4,65,25,485.
Example of SIP investment
In SIP investments also, the investment can grow faster with time because of compound growth. Let's take the example of an Rs 8,000 monthly SIP investment, and let's see how it grows in 10, 20, 30, and 40 years.
In 10 years, the total investment will be Rs 9,60,000, estimated capital gains will be Rs 8,32,287, and the estimated corpus will be Rs 17,92,287.
In 20 years, the total investment will be Rs 19,20,000, estimated capital gains will be Rs 54,38,859, and the estimated corpus will be Rs 73,58,859.
Example of SIP investment
In 30 years, the total investment will be Rs 28,80,000, estimated capital gains will be Rs 2,17,67,786, and the estimated corpus will be Rs 2,46,47,786.
In 40 years, the total investment will be Rs 38,40,000, estimated capital gains will be Rs 7,45,04,568, and the estimated corpus will be Rs 7,83,44,568.
Difference in SIP corpus
You can see how the investment every 10 years is growing by Rs 9,60,000, but the corpus is growing faster.
The corpus created in 40 years is nearly 13 times more than the corpus created in the first 20 years because of the power of compounding.
Calculations for story
In the story, we will calculate whether a one-time investment of Rs 10,00,000 or a monthly SIP investment of Rs 10,000 can be the faster way to reach the corpus of Rs 5,00,00,000. Let's see the calculations at a 12 per cent annualised return.
Years to reach Rs 5 crore corpus from Rs 10 lakh investment
It will take approximately 35 years to attain a corpus of Rs 5 crore.
In 35 years, estimated capital gains will be Rs 5,17,99,620, and the estimated corpus will be Rs 5,27,99,620.
Years to reach Rs 5 crore corpus from Rs 10,000 monthly SIP investment
In this case also, the estimated time to reach a Rs 5 crore corpus will be 35 years.
In 35 years, the total investment will be Rs 42,00,000, estimated capital gains will be Rs 5,09,08,311, and the estimated corpus will be Rs 5,51,08,311.
Conclusion
If we look at both calculations, the corpus created from a Rs 10 lakh investment is smaller compared to the one created from a Rs 10,000 monthly SIP investment.
But capital gains from Rs 10 lakh are higher by Rs 8,91,309.
Conclusion
The other point is that in case of SIP investment, the investment is higher by Rs 32,00,000.
So if one sees the estimated profit in case of the lump sum investment, it is Rs 40,91,309.