Lumpsum Investment

Investments are broadly classified into two categories: the SIP (Systematic Investment Plan) method and the Lumpsum method. A lumpsum investment method involves investing a significant amount of money in a single investment at once rather than spreading it out over time. It is considered wise to opt for the lumpsum method if the investor has a large financial corpus to invest.

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What is the Lumpsum Method of Investment?

Lumpsum, as the name suggests, is a way of investing money in any fund at once. It is more advisable to go for the lump sum method of investment in case the investor has received a significant amount through inheritance, bonus, etc. and is willing to invest rather than just keeping it in the bank.

SIP, on the other hand, helps investors deposit a fixed amount regularly to attain a decent corpus post-retirement. Regular investments under the SIP inculcate a savings habit among the investors.

SIP Vs Lump Sum

Here are the key differences between the Systematic Investment Plan option and the Lump Sum investment option in various funds:

Features SIP Lump Sum
Market Monitor It is advisable to check the market cycle during the complete SIP tenure. Market monitoring is not essential as investments are generally for the long term.
Flexibility It is considered more flexible than the lump sum method, as investments can be made according to the investor's financial condition. There is no flexibility in the lump sum method.
Market Volatility SIPs are not completely based on market volatility. The Lump sum method is highly responsive to the market.
Financial Discipline SIPs inculcate a financial discipline in the investor's life as it develop a habit of regular savings. As it is a one-time investment method, no such financial discipline is involved.

Benefits of Lump Sum Over SIP Investment Method

The following are the benefits of the lump sum method over the SIP method of investment:

  1. Best Suited for Self-Employed Individuals

    For people without a regular and steady source of income, the lump sum method of mutual fund investment can be considered more fruitful than the SIP method. SIP requires regular deposits, whereas a lump sum involves a one-time deposit, making it highly suitable for investors earning irregular income or profits.

  2. High Tax Benefits

    The Lump sum method of investment offers tax benefits up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961. High returns can also be expected if investments are made in ELSS funds for a long-term period.

SIP Vs Lump Sum: Which is Better?

It is always difficult to make a choice between SIP and Lumpsum methods of investment. Here are a few factors to be considered before opting for any investment type:

  1. Personal Risk Appetite

    Understanding the investor's personal risk appetite before choosing one of the two investment methods is crucial.

    The main difference between SIPs and lump sums is the degree of risk involved in their deposits. On the one hand, SIPs come with capital protection as regular deposits are involved; on the other hand, a lump sum requires a big corpus in one go.

    For example, if you wish to invest Rs. 2,40,000 in mutual funds or ULIPs in a financial year:

    • You have the option to pay Rs. 20,000 monthly if you opt for the SIP method. This will not overburden the investor's pocket.

    • If you opt for the lump sum method, Rs. 2,40,000 has to be deposited one-time.

    An investor needs to know which method suits their finances the best.

  2. Returns Involved

    Returns in both lump sum and SIP depend upon the market conditions at the time of withdrawal. However, it is important to know that in a general scenario:

    • SIP outperforms Lump Sum in unfavorable markets.

    • ELSS Lump Sum investments offer higher returns when the market is steady.

  3. Lock-in Period

    ELSS funds generally have a 3-year lock-in period, whereas lump sums can be withdrawn fully after the tenure is completed.

    Example,

    Lump sum lock-in

    Mr. X deposited the entire corpus in one go under the lump sum method on September 1st, 2018. 3 years later, on September 1st, 2021, the deposited amount will mature and be available for withdrawal completely.

    SIP lock-in

    • Mr. X deposits an amount in mutual funds under the SIP method every month, on September 1st, 2018, October 1st, 2018, November 1st, 2018, and so on.

    • 3 years later, the lock-in period will end, and the units will mature monthly, on September 1st, 2021, October 1st, 2021, November 1st, 2021, and so on.

How to Calculate Returns on Lumpsum Investments?

A Lumpsum Return Calculator is a hassle-free online tool for estimating investment returns. This one-time investment calculator allows you to find the expected value of your investment at the end of the investment period and plan your finances better.

How Does the Lumpsum Calculator Work?

The Lumpsum Return Calculator provides you with the investment's future worth at a pre-decided interest rate. Though the value of your lumpsum investment solely depends on the market performance, you can still get an estimate by using the below formula:

The Lumpsum Calculator Work on the following formula:
E = F (1 + x/z) ^ za
Here is the formula for Lumpsum calculation:
E
stands for Estimated returns
F
stands for Present value
x
stands for Interest rate
z
stands for Number of times interest is compounded in a year
a
stands for Duration of your investments

For Example: You have invested Rs 10 lakhs in your choice of fund with an interest rate of 10% for a 10 year period. In this scenario, the estimated return will be calculated by:

Estimated returns = 10,00,000 (1 + 10%) ^ 10 

Calculating such a complex calculation is quite difficult and time-consuming for a common person. However, with a Lump Sum calculator, you can easily calculate the estimated returns in the blink of an eye.

What are the Benefits of Using a Lump Sum Calculator?

Below are some of the benefits that one may avail of by using the Lumpsum Return Calculator:

  1. Closest Possible Estimate

    Calculating lumpsum returns on funds is quite a task manually, and the accuracy cannot be defined as they are subject to market risk. The lumpsum calculator helps you get the closest possible figure of returns.

  2. Hassle-Free Usage

    The lumpsum calculator is an online tool that can be easily used at any time of the day without any limitations.

  3. Reduces Manual Work

    Most investors find it difficult to calculate the lumpsum returns manually, as the formula for return calculation is very complex. Using the lumpsum calculator reduces the manual work and the inaccuracy of the return amount, giving the investor a better result.

To Conclude!

It is the investors' decision whether they want to invest in funds through the lump sum or the SIP method. Before investing their hard-earned money anywhere, one should have a complete knowledge of the market, their personal finances, and their risk appetite.

Happy Investing!

Past 5 Year annualised returns as on 01-06-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ

^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.

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