Parents trying to build a long-term fund for their child often get stuck on one question, should the money go in gradually through a monthly SIP in a mutual fund, or should it be invested as a lump sum once a year. Both routes grow money over time, but a calculation based on a 12 percent annual return over 20 years shows the final amount is far from identical.
The comparison here assumes a 20-year investment horizon and an average annual return of 12 percent for both routes, SIP as well as lump sum.
How much a Rs 10,000 SIP builds in 20 years
If someone starts a monthly SIP of Rs 10,000 and keeps it running for 20 straight years, the total amount invested out of pocket works out to roughly Rs 24 lakh. Adding an average annual return of 12 percent on this over 20 years brings in returns worth Rs 67,98,574 alone. That means the total corpus, investment plus returns, grows to Rs 91,98,574. In simple terms, a total of Rs 24 lakh goes out over 20 years, but the final fund in hand comes to roughly Rs 92 lakh.
How much a lump sum investment builds
Now consider the lump sum route. If someone invests Rs 1.20 lakh in one go and it earns the same 12 percent annual return, the amount grows to Rs 11,57,555 after 20 years. Of this, the return portion alone comes to Rs 10,37,555. But this figure is only the 20-year outcome of a single Rs 1.20 lakh investment made in just one year, not of investing that amount every single year.
What a yearly Rs 1.20 lakh investment builds over different periods
To make a fair comparison, it helps to see how a Rs 1.20 lakh investment made in a given year grows at 12 percent annual return over the years left until the 20-year mark. Here is how that plays out.
- Invested for 19 years, Rs 1.20 lakh at 12 percent return grows to Rs 10,33,531.
- Invested for 18 years, the same amount grows to Rs 9,22,796.
- Invested for 17 years, it grows to Rs 8,23,925.
- Invested for 16 years, it grows to Rs 7,35,647.
- Invested for 15 years, it grows to Rs 6,56,828.
- Invested for 14 years, it grows to Rs 5,86,453.
- Invested for 13 years, it grows to Rs 5,23,619.
- Invested for 12 years, it grows to Rs 4,67,517.
- Invested for 11 years, it grows to Rs 4,17,426.
- Invested for 10 years, it grows to Rs 3,72,702.
- Invested for 9 years, it grows to Rs 3,32,769.
- Invested for 8 years, it grows to Rs 2,97,116.
- Invested for 7 years, it grows to Rs 2,65,282.
- Invested for 6 years, it grows to Rs 2,36,859.
- Invested for 5 years, it grows to Rs 2,11,481.
- Invested for 4 years, it grows to Rs 1,88,822.
- Invested for 3 years, it grows to Rs 1,68,591.
- Invested for 2 years, it grows to Rs 1,50,528.
- Invested for just 1 year, it grows to only Rs 1,34,400.
SIP or an annual lump sum, which wins
The full calculation makes the difference clear. Running a Rs 10,000 SIP for 20 years takes the total corpus to roughly Rs 92 lakh. But if the same person instead puts in Rs 1.20 lakh as a lump sum every single year and earns the same 12 percent return, the total corpus after 20 years works out to only Rs 85,15,292. That leaves the lump sum investor roughly Rs 7 lakh behind the SIP investor.
The numbers show that even with the identical rate of return, the way money is put in can make a substantial difference to the final fund. When building a long-term corpus for a child, it is not just the rate of return that matters, but also the method of investing.
