SIP vs Lump Sum: Rs 22 lakh investment for 22 years; which can help you get higher corpus in long term
SIP vs Lump Sum: In a lump sum mutual fund investment, one can invest an amount one time, while in SIP, they can invest periodically. SIPs can be daily, monthly, etc. In both of them, investors get compound returns.
SIP vs Lump Sum: Mutual fund investors can invest in a scheme through the systematic investment plan (SIP) or lump sum. In a lump sum, investors can invest their entire amount in one go, while in an SIP investment, they deposit periodically. The SIP investment cycle can be daily, weekly, monthly, quarterly, half-yearly, or yearly. Both investment types provide the benefit of compound growth, where investments grow faster in the long run. Investors use both of them to create wealth or a retirement corpus. Know more details about lump sum and SIP investments and know which of the two- SIP or lump sum- can create a higher corpus on a Rs 22 lakh overall investment in 22 years.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What is lump sum investment?
A lump sum investment is a one-time investment in a mutual fund scheme. When someone has a sizeable amount in the form of a salary bonus, inheritance share, etc., and instead of investing it in phases, they want to invest it in one go, such investment is known as a lump sum investment.
What is SIP investment?
In an SIP, investors invest periodically in an investment cycle that suits their income cycle. The investment can be daily, monthly, weekly, quarterly, half-yearly, or yearly. The most popular SIP is monthly since the income cycle of most investors is that only.
How to choose between lump sum and SIP
The common thing between them is that either investment is for the long term.
The good time to invest through a lump sum is when the share market is down. But even if the share market has gone 20 per cent down in a few months and market conditions are unfavourable, it is nearly impossible to predict the future direction of it. So, the solution is that the lump sum investment can be done for the long term. In a long period of time, the market is most likely to go up.
How to choose between lump sum and SIP
In SIP investment, one doesn't need to time market. Since an investor is buying net asset value (NAVs) at different prices at every investment cycle, their investments are more likely to grow. But it doesn't mean that SIP investments will always be positive. There can be years of periods where SIP returns can be negative. But in 5-7 years, SIP returns are most likely to be positive.
Compound benefits in lump sum and SIP
Investors get the benefit of compounding both ways. They get investment growth not only on the principal but also on the returns. In the long term, growth on returns can help one grow their investments many times such as 25X, 50X, 100X, or more.
Example of compounding in lump sum investment
Suppose an investor gets Rs 1 lakh in a salary bonus. Instead of spending it right away, they want to use it for their retirement corpus. They need it after 30 years. See how their amount can grow in 3 decades at a 12 per cent annualised return.
In 10 years, the investment will grow to an estimated corpus of Rs 3,10,585.
Example of compounding in lump sum investment
In 20 years, the estimated corpus will be Rs 9,64,629.
In 30 years, the estimated corpus will grow to Rs 29,95,992.
You can see that it is growing faster every 10 years.
Now, if the investor continues it for another 5 years, the estimated corpus will be Rs 52,79,962.
Example of compounding in SIP investment
A 25-year-old person earns Rs 30,000 a month, and they want to invest Rs 6,000 in a monthly SIP for their retirement scheduled after 35 years. Let's see how much corpus they can generate from it at 12 per cent annualised growth.
In 10 years, the total investment will be Rs 7,20,000, and the estimated corpus will be Rs 13,94,034.
Example of compounding in SIP investment
In 20 years, the investment will be Rs 14,40,000, and the estimated corpus will be Rs 59,94,888.
In 30 years, the total investment will be Rs 21,60,000, and the estimated corpus will be Rs 2,11,79,483
In 35 years, investment will be Rs 25,20,000 and the estimated corpus will be Rs 3,89,71,614.
Here also, you can see how investment grows faster with time.
Story calculations
For our story, we are calculating the return from a Rs 22 lakh investment in 22 years, and also the return from a Rs 1 lakh SIP per year investment, or Rs 22 lakh overall investment, spreading in 22 years. At that calculation, the monthly SIP investment will be Rs 8,333. The annualised rate of return will be 12 per cent.
Corpus from Rs 22 lakh lump sum investment in 22 years
Estimated capital gains from that investment will be Rs 2,44,20,682, and the estimated corpus will be Rs 2,66,20,682.
Corpus from Rs 1 lakh annual SIP investment in 22 years
Estimated capital gains from this investment will be Rs 85,98,789, and the estimated corpus generated in 22 years will be Rs 1,07,98,701.
Why lump sum corpus is higher
The difference is because in a lump sum, the investor gets return on the entire amount from Day 1. While in a SIP investment, the investment is being made in 22 years in phases, so the return is on the invested amount at a particular time.