What is Lumpsum?
A lumpsum investment is when you invest the entire amount in a mutual fund in one go, instead of spreading it across monthly instalments. It suits investors who have a large sum available at once, such as a bonus, an inheritance or the proceeds of a sale.
Because the full amount is invested from day one, all of it starts compounding immediately. The flip side is that the entire investment is exposed to the market level on the day you invest.
SIP and lumpsum are two ways of investing in the same mutual funds. SIP spreads your investment over time, while lumpsum puts it all to work at once.
Fun fact
Many investors combine both: a lumpsum to start with, followed by a monthly SIP to keep adding to the same fund.
What is a Lumpsum Calculator?
A lumpsum calculator estimates how much a one-time investment could grow to over a chosen period, based on the rate of return you expect from the fund.
Lumpsum calculators do not tell you the exact amount you will receive. The actual return depends on factors such as future market returns, the fund’s expense ratio and how long you stay invested.
Why you should use a Lumpsum Calculator?
- Quick estimates: See the likely value of your investment in seconds instead of working out compound interest by hand.
- Goal planning: Work out how much you need to invest today to reach a target amount by a given year.
- Helps in comparison: Compare how different expected returns and time periods change the outcome before you choose a fund.
How Does a Lumpsum Calculator Work?
The lumpsum calculator works on the following inputs:
- Total Investment (P): The amount you invest once.
- Expected Return Rate (r): The anticipated rate of return you expect to earn yearly.
- Time Period (t): Number of years for which you stay invested.
The lumpsum calculator relies on the compound interest formula:
Future Value = P × (1 + r)^t
- P
- Total amount invested
- r
- Expected yearly rate of return ( Expected Return Rate / 100 )
- t
- Time period in years
Formula to Calculate Lumpsum Returns with an Example
Consider an example for a better understanding.
- Total Investment: ₹1,00,000
- Time Period: 10 years
- Expected Return Rate: 12% per annum
Using the formula:
FV = 1,00,000 × (1 + 0.12)^10
After calculation, you will get an approximate future value of ₹3,10,585.
In conclusion, ₹1,00,000 invested once at an annual growth rate of 12% for 10 years will grow to ₹3,10,585.
What are the benefits of a lumpsum investment?
- Full compounding: The whole amount earns returns from the first day, which can lead to a larger corpus over long periods.
- Convenient: One transaction, with no monthly instalments to track or keep funded.
- Professional Management: Your money is managed by professional fund managers with vast domain knowledge.