The process of choosing how to invest your hard-earned money into mutual funds is a common problem for most investors. Mutual funds India offers two options to invest in one-time investments, also known as lumpsum, and regular investments, popularly known as SIP.
As both ways are suitable for mutual fund investors, the question is which one to choose. The answer is simple – If you have surplus money in hand, you can invest in lumpsum and let the investment grow else if you have surpluses every month after meeting your expenses, SIP mutual fund investment can be ideal.
However, many experts still compare lumpsum and SIP investing considering the following key points before they invest in mutual funds –
Flexibility – Mutual fund SIP tends to be more flexible than lumpsum as the investor can choose a date, amount, and frequency to invest and build a corpus brick by brick which is not possible in lumpsum investments.
Cash Flow – While SIP requires a regular cash flow as you are investing in a staggered manner, in the lumpsum there is no commitment for further investments.
Minimization of risk – As you invest regularly via SIP, you acquire units at different NAV and thus benefit by rupee cost averaging. This also minimizes the risk. This is not possible in the case of lumpsum investment, as you invest in one go without knowing if the investment is at a high point or low point of the market.
Cost of Investment – Due to rupee cost averaging, the acquisition cost in SIP is less while in the case of lumpsum, you are not sure as you are investing at a particular price point.
However, in this article, we will focus on lumpsum investing only –
Lumpsum investment – Suppose you want to invest for 10 years and you have Rs 5 Lakhs to invest in equity mutual fund schemes expecting 12% returns. How do you calculate the future value of your investments? To find the answer, you can use a lumpsum calculator which will show you the future value as Rs 15.53 Lakhs. In a lumpsum calculator, all you have to do is input the amount, period, and expected return and you get the results instantly.
SWP investment – The above was an example of lumpsum investment where you remain invested till the investment period ends. But what if you need regular income from your lump sum investments? The process is known as SWP – It allows you to draw a fixed amount at a regular frequency (say monthly, quarterly, half-yearly, and yearly). But the question is, how will you know what would be the value of your mutual fund investments after the SWP withdrawal?
In this case, you need to use the SWP calculator. In the SWP calculator, you have to input the lumpsum investment amount, expected rate of return, frequency (say monthly) period, and the SWP amount.
Let’s see an example-
Suppose you want Rs 6,000 per month for 20 years expecting a 10% return from your one-time investment of Rs 10 Lakhs in mutual funds. The SWP calculator will show the result as follows – You would be drawing Rs 14.40 Lakhs in 20 years from your initial investment of only Rs 10.00 Lakhs and the final balance amount would be Rs 27.34 Lakhs.
As you can find from both examples using a lumpsum calculator and SWP calculator, based on your investment needs, is most desirable as you get good guidance for your investments and can take an informed decision.