What kind of returns can you expect if you make a one-time investment of Rs 2 lakh along with a monthly SIP of Rs 2,000 for 20 years if the fund you selected grows at an annualised 12 per cent? Many investors prefer setting up an SIP to channelise their surplus cash in mutual funds gradually. This is helpful in cases where the investor does not want to block a major chunk of their cash at once or has only limited funds available for investing regularly. However, combining a one-time investment—or a lump sum investment—with an SIP in a mutual fund (MF) of choice can increase their chances of building wealth thanks to compounding. Now, what is compounding? Simply put, it is the phenonemon that enables periodic returns to get added up to initial principal, 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 2 lakh and setting up a Rs 2,000 monthly SIP in a mutual fund for 20 years.
Now, these returns are modest given some of the actual returns recorded in the past 10 years. As of March 21, the top three mutual funds each in largecap, midcap, smallcap and aggressive hybrid (equity plus debt) have delivered returns to the tune of 13-21 per cent in the last 10 years, according to data from industry body AMFI.
Here are details of these returns across these categories:
Largecap: 14 per cent
Midcap: 18 per cent
Smallcap: 20-21 per cent
Hybrid: 13-16 per cent
ALSO READ: Rs 1 lakh one-time investment & Rs 1,000 monthly SIP for 25 years: What 10%, 12%, 15% annualised returns may mean for you
Now, let’s get back to our examples.
Here, were are assuming that the investor makes a Rs 2 lakh investment along with a Rs 2,000 monthly SIP for 20 years. That takes the total money invested to Rs 6.8 lakh (Rs 2 lakh plus Rs 4.8 lakh).
10% Annualised Return: What a Rs 2 lakh one-time investment and a Rs 2,000 monthly SIP may mean for investors
At an annualised 10 per cent return, a Rs 2 lakh initial investment and a Rs 2,000 monthly SIP will lead to a corpus of approximately Rs 28.77 lakh in 20 years, calculations show.
12% Annualised Return: What a Rs 2 lakh lump sum investment and a Rs 2,000 monthly SIP may mean
Similarly, a 12 per cent annualised return will lead to a corpus of approximately Rs 39.28 lakh, as per calculations.
15% Annualised Return: What a Rs 2 lakh one-time investment and a Rs 2,000 monthly SIP may mean
The same investment will lead to a total corpus of approximately Rs 63.05 lakh at an annualised return of 15 per cent, calculations show.
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
What if you take the Rs 2 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 2,833 without any initial investment.
Spreading the same Rs 6.8 lakh of total investment over a period of 20 years leads to a monthly SIP of approximately Rs 2,833.
A total investment of Rs 3,99,900 through monthly instalments of Rs 2,833 will lead to a corpus of approximately Rs 28.31 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.
