mutual fund
In today’s time, mutual funds have become a popular investment option for creating wealth. The two most common ways to invest in mutual funds are Systematic Investment Plan (SIP) and lump sum investment. Many people have a question in their mind that if they do SIP of ₹ 5,000 every month or invest ₹ 1 lakh at one go, then which way can create a fund of ₹ 20 lakh fastest?
What is SIP?
SIP is a method in which you invest a fixed amount in a mutual fund every month or at a fixed time. For example, if you invest ₹ 5,000 every month, this amount is regularly invested in mutual funds. The biggest feature of SIP is that a large amount is not required to start investing. People with low income can also start investing with small amounts and build a good fund with time.
What is lump sum investment?
Lumpsum investment means that you invest the entire amount at one go. For example, if someone gets a large amount of money at once from bonus, inheritance, selling property or any other source, he can invest the entire amount in mutual funds at once. There is no need to invest every month, rather the entire amount invested keeps increasing with time.
When will a SIP of ₹5,000 become ₹20 lakh?
If an investor does a SIP of ₹5,000 every month and gets an average return of 12% per annum, he can create a corpus of around ₹20 lakh in about 13 to 14 years. During this period, the total investment can be around ₹ 8 lakh, the earning from interest and compounding can be around ₹ 12 lakh and the total fund can be around ₹ 20 lakh. That means the investor invested only ₹8 lakh, while the remaining amount grew due to the power of compounding.
When will lump sum of ₹1 lakh become ₹20 lakh?
If a person invests ₹ 1 lakh at a time and also gets 12% annual return, then this amount can take about 26 years to become ₹ 20 lakh. No extra money is invested in this every month. Therefore, the entire growth depends only on the compounding returns on the initial ₹1 lakh.
Which method reaches the goal quickly?
Going by this example, a SIP of ₹5,000 can get you a target of ₹20 lakh in around 13-14 years, whereas a lump sum investment of ₹1 lakh can take around 26 years to reach the same target. The biggest reason for this is that new investments keep getting added to SIP every month. Due to this, the total amount of investment increases continuously and the benefit of compounding also increases. Whereas, in lumpsum investment only the initial amount increases. If the initial investment is less, it may take more time to achieve the big goal.
Keep these things in mind before investing
SIP is considered better for those people who can save a little bit every month. Lump sum investment may be suitable for those who already have a large amount of money available. The returns received in mutual funds are not fixed. The 12% return given here is only an estimate. Before investing, keep in mind your income, risk appetite and financial goals.
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