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Comparing Lump Sum vs Systematic Investments Calculator

31 Jul 2023

If you want to invest in mutual funds, you might wonder whether to go for a lump sum or a SIP. These investment approaches have benefits and drawbacks based on your risk tolerance, future goals, and market conditions. But before you go any further, you must understand the investment calculators.

This article will provide in-depth information underlying lumpsum vs SIP calculator distinctions.

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What is a SIP calculator?

A SIP calculator is an online tool. It aids in organising your mutual fund investments using a systematic approach. SIP stands for Systematic Investment Plan. It means you can invest a fixed amount of money at regular intervals (usually monthly) in a mutual fund scheme of your choice. This calculator assists you in predicting the growth of your investment over time by considering the expected rate of return and the investment duration.

How does the SIP calculator work?

To use a SIP calculator, you need to enter some basic information, such as:

  • Investment amount: This is the amount you want to invest monthly in the mutual fund scheme. You can start with as low as Rs. 500 per month and increase it per your financial goals and capacity.
  • Expected rate of return: This is the annualised percentage return you wish to earn from the mutual fund scheme. You can use the past performance of the scheme or the category average as a reference, but remember that past returns are not indicative of future returns.
  • Investment period: The years you want to stay invested in the mutual fund scheme. Depending on your financial goals and risk appetite, you can choose a short-term, medium-term, or long-term horizon.

Once you enter these details, the SIP calculator will show you the following results:

  • The total amount invested over the investment period: This is the sum of all your monthly
  • The amount that you are likely to earn from your investment, based on your input
  • The total value of your investment

SIP Calculation Formula

SIP calculator uses different mathematical formulas for different types of computations. For example, if you wish to learn about your investment's future value, the calculator utilises the below formula–

Future Value = SIP Amount × ({ [1 + Expected Return Rate]^ Tenure – 1} / Expected Return Rate) × (1 + Expected Return Rate)

Note: You must convert the annual expected return rate per investment frequency.

For example, if you want to calculate the FV for a SIP with Rs 1,000 monthly contributions for two years and an expected rate of return of 12%, this is what the formula would look like for you:

FV = 1000 × ({ [1 + 0.01]^24 – 1} / 0.01) × (1 + 0.01)

FV = Rs 27,126

What is a Lumpsum calculator?

A lump sum calculator is an online software that helps you estimate the future value of your investment if you invest a large amount of money at once in a mutual fund scheme. It uses a formula considering almost the same factors as the SIP calculator. It also factors in the effect of compound interest, meaning you earn interest on both your principal and the accumulated interest over time.

How does Lumpsum Calculator work?

The Lumpsum calculator is based on the following formula to provide near-precise results.

Future Value = Investment * (1 + Annualised Rate of Return) ^ Tenure

For example, if you invest Rs. 10,000 for 10 years at an annual rate of return of 10%, then the future value of your investment will be:

Value = 10,000 * (1 + 0.1) ^ 10 Value = 25,937.42

Your Rs. 10,000 investment will grow to Rs. 25,937.42 after 10 years.

SIP or Lumpsum— Which is Better?

There is no definitive answer to this, as it depends on your financial goals, risk appetite, market conditions, and investment horizon. However, here are some general points to consider when choosing between the two modes of investing in mutual funds:

  • SIPs are more suitable for beginners or those who have a regular income and want to invest in a disciplined manner. It helps you average the cost of buying units and benefits from the power of compounding over time. 
  • SIPs can also reduce the impact of market volatility and emotional bias on investment decisions.
  • Lumpsum investments suit experienced or savvy investors who can time the market well. It can help you take advantage of favourable market conditions and generate higher returns in a shorter period. However, these investments also carry higher risks.
  • You can also combine SIP and lumpsum methods to optimise your portfolio performance. For example, you can start with a lumpsum investment when the market is low and then continue with a SIP to maintain your exposure and accumulate more units. Alternatively, you can start with a SIP and then make additional lumpsum investments when the market dips or you have surplus funds.

Conclusion

SIP and lumpsum calculators are valuable tools that help you make informed investment choices. However, the stock market is uncertain, and there are multiple external factors that the calculator does not consider. So, instead of solely relying on this tool, you should conduct more research on ongoing trends and always be ready to adjust your investment strategy.

 

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