Advantages of Lump sum investment

The Indian retail investors have pumped in around 5,000 crores in the equity mutual fund schemes through the SIP route in order to generate the returns. The number says it all; there are more than 1.52 crore SIP accounts in the country, which reflects how SIP is becoming a household name.

Lump sum investment

But does SIP help the investor to get richer? Well, not really. Here, in this article, we will suggest you advantages of lump sum investment as compared to the traditional mode.

We can understand this better without the use of a lump sum investment calculator by evaluating different scenarios

Scenario 1– An investor begins his SIP in Aditya Birla Mutual Fund Scheme- growth in March 2004. He continues to pay towards his SIP till 2008 and when the stock market tumbles, and he loses his patience. He withdrew the SIP when the market was still at the bearish phase. As per a typical lump sum investment calculator, his annualised returns were 4.61% even after investing for four years.

Scenario 2– An investor starts investing a lump sum amount in a similar scheme when the market was on a roller coaster ride. The investor continued moving forward for five years, and he exits the scheme in February, thus earning 12% annualised returns.

The power of lump sum investment

See, how the equation has changed. It is witnessed that the SIP tends to generate better returns during the falling market. The lump-sum investment exposes the investor towards the vagaries of the market conditions and thus mitigating the market risk.

The time horizon matters a lot. The key to success is to stick towards the conviction and hold on to the investments during the volatile phase. If you are a long-term investor with a passion for generating wealth, you will easily understand the magic of compounding.

The pre-requisites

However, there are a string of terms and conditions associated with it, one of being the ability to time the market.

Moreover, if you are a professional investor, you can adopt both the strategies to success. While you can invest the lump-sum amount, when the markets are crashing. On another hand, you can follow the small amount SIP route, if you have insufficient cash in hand. Other factors that may decide your mode of investment can be

  • Amount of cash in hand– if we look carefully in the below- mentioned example, we will see what a magic a lump-sum amount can make. Consider this: an amount of Rs 5 lakh would fetch around Rs 60,00,000 after the completion of 10 years as per a lump sum investment calculator.

While on the other hand if an investor invests the same amount through the monthly SIP at the end of 10 years, the amount generated would be Rs 22,30,000 at an annualised return of 15%. Now, you can easily see the difference

However, it depends upon how much money or cash the investor has in his pocket. If he has 15 lakh, he can park the money then and there.

  • Conviction– Though the data suggests that there are several advantages of investing a lump-sum amount, but the investor should have a conviction towards this belief. Without it, there would be a mental load where to invest that will offer better returns. The lump-sum investment is not suitable for a short term.

To wrap up

In the end, we would like to conclude lump sum investment lets you build a great corpus over the long term as compared to traditional SIP plans. Try to make the lump-sum investment if you have cash in hand. And never lose nerve while entering the market.

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