Rs 4 Lakh Investment for 40 Years vs Rs 40 Lakh Lump Sum for 19 Years: Which can create larger fund for you at 12% return in long term?

Why does duration matter in an investment? It's because an investor gets more years for compound growth of their investment. In the short term, it may not appear to be significant, but in the long term it can't go unnoticed. Let's understand it with a few examples. 

Let's see what a Rs 6 lakh investment can produce if it grows at 12 per cent in 15, 25, and 35 years. In 15 years, estimated capital gains will be Rs 26,84,139, and the estimated corpus will be Rs 32,84,139. 

In 25 years, estimated capital gains will be Rs 96,00,039, and the estimated corpus will be Rs 1,02,00,039.  In 35 years, estimated capital gains will be Rs 3,10,79,772, and the estimated corpus will be Rs 3,16,79,772.

The pace of investment growth is improving every 10 years.  From 25 to 35 years, the corpus is growing by 3 times. 

Suppose you want to invest a fraction of your salary in the form of a Rs 5,000 monthly SIP, where your annualised return is 12 per cent. Here are the corpuses you can create in 20, 30, and 40 years. In 20 years, the total investment will be Rs 12,00,000, estimated capital gains will be Rs 33,99,287, and the estimated corpus will be Rs 45,99,287.

 

In 30 years, the total investment will be Rs 18,00,000, estimated capital gains will be Rs 1,36,04,866, and the estimated corpus will be Rs 1,54,04,866.  In 40 years, the total investment will be Rs 24,00,000, estimated capital gains will be Rs 4,65,65,355, and the estimated corpus will be Rs 4,89,65,355.  If you look at the rise between 30 and 40 years, with an extra investment of just Rs 6,00,000, the extra corpus generated is more than 3 times. 

Now let's see how a small amount can generate a larger corpus compared to what a bigger amount can do.  Here, we take the example of a Rs 2 lakh lump sum and a Rs 10 lakh lump sum investment in a mutual fund. The expected annualised return in each case is 12 per cent. The duration for a Rs 2 lakh investment is 35 years, and for a Rs 10 lakh investment, it is 20 years.

Estimated capital gains from a Rs 2 lakh investment in 35 years will be Rs 1,03,59,924, and the estimated corpus will be Rs 1,05,59,924. Estimated capital gains from a Rs 10 lakh investment in 20 years will be Rs 86,46,293, and the estimated corpus will be Rs 96,46,293.

You can see that a Rs 2 lakh investment is generating nearly Rs 17 lakh extra capital gains because of 15 years of extra compounding compared to a Rs 10 lakh investment. 

We will show which of the two investments at a 12 per cent annualised return can generate a higher corpus – a Rs 4,00,000 for 40 years or Rs 40,00,000 for 19 years.

In 40 years, estimated capital gains from a Rs 4 lakh one-time investment will be Rs 3,68,20,388, and the estimated corpus will be Rs 3,72,20,388. 

In 40 years, estimated capital gains from a Rs 40 lakh investment will be Rs 3,04,51,047, and the estimated corpus will be Rs 3,44,51,047. 

If you compare the capital gains generated from a Rs 4 lakh investment, they are way ahead of the gains created from a Rs 40 lakh investment. It's because the Rs 4 lakh investment is getting 21 years of extra compounding.