Lump Sum Or SIP? Which Investment Method To Choose?

Aug 15, 2022

What is a Lump Sum Investment?

A lump sum investment is a one-time investment made by you. If you have invested an amount of INR 1,00,000 in a mutual fund in a single payment, instead of investing it in multiple installments, you have made a lump sum investment of INR 1,00,000. If you have a significant amount at your disposal and high-risk tolerance, you can choose to make a lump sum investment.

What is a Lump Sum Calculator?

An online mutual fund lump sum calculator can assist investors in estimating the returns that they will receive from a lump sum mutual fund investment. A mutual fund one-time investment or lump sum calculator provides the maturity amount for a particular present value lump sum investment. The invested amount at the start of the tenure determines the value of the wealth accumulated over the investment period.

While using the calculator, the lump sum payment amount or one-time investment must be entered by the investor. In addition, they must also enter the number of years and rate of return.

If a potential investor has INR 2 lakh in cash ready, they can make a lump sum investment. However, they must utilize a lump sum calculator if, before investing the lump sum payment, he wishes to assess the investment’s returns and the wealth that can be obtained from each investment.

He must first choose the period for his investment. Then he needs to determine the return on the mutual fund investment that he anticipates.

The calculator uses the following formula to determine the maturity amount at the end of the investment period.

A = P*(1+rn)^nt

In this formula, A is the maturity amount.

The lump sum investment amount is indicated by P.

The ‘r’ is the rate of interest.

The investment tenure in the form of years is represented by ‘t’.

The ‘n’ is the number of compounding periods in a year.

Now consider the example where you are investing INR 2,00,000. You choose to invest this amount for three years in a fund with an rate of return of 15%, compounded annually.

Maturity Amount (A) = 2,00,000*(1+0.15)^3 = INR3,04,175

The interest accrued will be INR 1,04,175.

The anticipated wealth and return are simply projections and do not guarantee the amounts computed. Depending on how well the mutual fund in which the money is invested performs, actual returns may differ. Based on the mutual fund’s and the underlying assets’ current performance, it may be higher or lower than the return.

The Nature of Investment in mutual funds (SIP/ Lump sum)

There are two ways that an individual can decide to invest in mutual funds. Apart from making a lump sum investment, he can use a SIP to invest a fixed sum at a fixed frequency, such as monthly or quarterly.

Lump sum

An investor usually chooses this investment option if they have received a lump sum of money from selling some asset. They can also make a lump sum investment when they receive a bonus at their workplace.

Large sums of money invested at once can be dangerous and lock up your funds; an early withdrawal may result in exit load fees and penalties. As a result, an investor needs to reconsider all the factors before investing.

A systematic transfer plan, or STP, allows an investor to make investments over 12 months in a predictable manner. A fund house enables an investor to participate in STP by allowing them to invest a big payment in one scheme and make regular transfers of a amount into a different plan.

It is an automated method of transferring money from one mutual fund to another. Investors who prefer to make a lump sum investment, forgo market-timing risk, and average out market fluctuations should pick this plan.

This option is typically chosen by the investor who has a lump sum of money and ultimately wishes to invest in equity mutual funds. They initially invest their lump sum amount in a debt mutual fund and then choose an STP to make periodic transfers to an equity mutual fund.

Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a service provided by mutual funds that allow investors to make predetermined investments in mutual funds at regular periods, such as monthly, quarterly, or annually.

An investor can develop the habit of saving and investing in this way without being concerned about a one-time cash expenditure. For example, the set sum may start at INR 500.

How does the Lump Sum Calculator help you?

Estimating whether the chosen investment option will achieve the desired results after the investment term is crucial for prospective investors. A mutual lump sum calculator helps them in planning their financial goals. An investor can predict future profits and wealth creation for a specific investment period using the mutual fund lump sum calculator.

  • An investor can easily alter the time frame, investment amount, and rate of return in a calculator to obtain an estimate of returns for each iteration. An investor can experiment with several combinations of the investment amount, time frame, and recovery speed before settling on the best one.
  • An investor with a goal in mind can use the calculator to see whether or not those goals are being reached.
  • The calculator is incredibly user-friendly and straightforward. An investor only has to have the necessary data on hand.
  • It helps the investor avoid mistakes and saves time by eliminating the need for manual calculations.

The benefit of Mutual Fund Lump Sum Investment

  • Convenience: It is more practical to invest in a bulk sum or once if you do not want the stress of keeping a schedule of a large number of payments. Instead of fretting over payment deadlines and setting aside money each month for investments, an investor invests once and for years.
  • Freedom from Investment Commitment: This method does not force you to be to making future investments. It is suited for those individuals who lack fixed earnings.
  • Compounding Benefit: Lump sum investment is particularly beneficial in bear market conditions. When the market is down, investors can make a lump sum payment to purchase more mutual funds at a reduced price.
    • A lump sum payment helps you earn higher interest, as all of your money starts growing right from the beginning of your investment period. For instance, you have chosen to invest INR 2,000 every month for 10 years, at a 12% rate of interest. Your total investment amount for this period will be INR 2,40,000 and your maturity amount will be INR 4,64,678. If you invest the same amount, INR 2,40,000 as a lump sum payment and remain invested for 10 years, your maturity amount will be INR 7,45,404 at the same rate of interest.
    • However, there will always be a risk of a market downturn. Lump sum investments expose you to higher risk.

Other Investment Alternatives

To expand your portfolio, it is always a good idea to consider various investment alternatives. Thus, your risk is reduced, and your rewards are maximized. You can make investments in safer options such as fixed deposits and government bonds. Consider investing in stocks if you have a high-risk tolerance. One of the rapidly growing investment opportunities made possible by technology is P2P lending.

It gives you a choice that is best of both worlds – High Returns and Zero Volatility!

The fixed maturity peer-to-peer investment plan from LenDenClub offers annual returns of up to 10–12% p.a. on your investment.

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