Which is batter, A 2,000 sip per mounth for five years or a 120,000 lump sum?
2,000 rupees per month over a time period of 60 months would result in a total investment of 120,000. There's a part of me that wants to say that investing the amount as a lump sum is a better choice because it would generate a higher return but there's also a side of me that should tell you the risks lump sum investments possess. Based on your risk appetite, you can take the call.
You see if I assume a 12% CAGR over 5 years, which is the average rate of return that the market has given over time, a SIP of 2,000 per month over 5 years would give you about 165,000. But, if you make a lumpsum investment and wait for 5 years, the same principal amount would become 211,000. So that’s 28% more than what you would have made from SIP.
Having said that, a conservative approach would still be to do an SIP every month because SIPs help you to swim through the ups and downs of the market. Let’s say, you invest 120,000 and the market goes down by 10% the next month, you will not just be at a loss of 12,000 but to break even, you would need the market to rise up by 11.11% which might be a year or so! However, in SIPs, if the market goes by 10% in the first month, only the initial 2,000 is affected. In the second month, you will be able to buy more units since the market is down with the second SIP. Hence, it will even things out in the long run.
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