Mutual Fund SIP Investment: Many investors prefer setting up a systematic investment plan (SIP) to park their savings in mutual funds gradually. This is particularly helpful in cases where the investor does not want to block a significant pile of their surplus cash at once or has only limited funds available for investing regularly. However, combining a lump sum investment—or a one-time investment—with an SIP in a carefully selected mutual fund can increase their chances of building wealth thanks to compounding, which is nothing but periodic returns getting added up to initial principal and leading to accelerated overall investment growth.
In this article, let’s take annualised return rates of 10 per cent, 12 per cent and 15 per cent, and see what they can actually mean for an investor making a lump sum deposit of Rs 1 lakh in a fund and setting up a Rs 1,000 monthly SIP in the same fund for 25 years. Now, these returns are modest given some of the actual returns recorded in the past five years.
As of March 17, the top three mutual funds each in largecap, midcap, smallcap and hybrid (equity plus debt) have delivered returns to the tune of 24-46 per cent in the last five years, according to data from industry body AMFI. Here are details of these returns across these categories:
- Largecap: 24-26 per cent
- Midcap: 30-34 per cent
- Smallcap: 33-46 per cent
- Hybrid: 27-28 per cent
ALSO READ: Top 5 Large Cap Index MFs in 5 Years: No. 1 fund has turned Rs 1.5 lakh one-time investment into Rs 4.10 lakh; see list
Now, let’s get back to our examples.
10% Annualised Return: What a Rs 1 lakh one-time investment followed by a Rs 1,000 monthly SIP may mean for investors
At an annualised 10 per cent return, a Rs 1 lakh initial investment and a Rs 1,000 monthly SIP will lead to a corpus of approximately Rs 24.21 lakh in 25 years (given the total investment of Rs 4 lakh), calculations show.
12% Annualised Return: What a Rs 1 lakh one-time investment followed by a Rs 1,000 monthly SIP may mean for investors
Similarly, a 12 per cent annualised return will lead to a corpus of approximately Rs 35.98 lakh, as per calculations.
15% Annualised Return: What a Rs 1 lakh one-time investment followed by a Rs 1,000 monthly SIP may mean for investors
The same investment will lead to a total corpus of approximately Rs 65.78 lakh at an annualised return of 15 per cent, calculations show.
What if you take the Rs 1 lakh initial investment out of the picture?
Let’s see what happens if the investor instead chooses to set up a monthly SIP of Rs 1,333 without any initial investment.
Spreading the same Rs 4 lakh of total investment over a period of 25 years leads to a monthly SIP of approximately Rs 1,333.
A total investment of Rs 3,99,900 through monthly instalments of Rs 1,333 will lead to a corpus of approximately Rs 25.3 lakh at 12 per cent, as per calculations.
However, it is worth noting that these examples take the same annualised return for lump sum and SIP investments. Practically, annualised returns vary in lump sum and SIP modes of investing for a number of reasons. Investors must also consider that although lump sum investments may perform better in a rising market, SIPs outperform lump sum investments in times of market downturn or volatility.
