Mutual Funds Day 44: SIPs but with Adhoc Lumpsum in between & Step-Up SIP with Step-Up L
We saw the power of SIPs and stepped up SIPs in the previous chapters. If you have not read them yet, please do so.
https://viswaram.com/mutual-funds-day-42-power-of-sip-and-step-up-sip-6e94d5e48791
Today, we are going to take it a step further, we are going to add lumpsum payments to the existing SIPs every year.
Case1: Fixed lumpsum payments per year on standard SIPs
Case2: Fixed lumpsum payments per year on step-up SIPs
Case3: Step-up lumpsum by 10% per year on step-up SIPs
At present, there are no online calculators or tools that do this job. I had to create an offline tool to model these calculations. The rationale is that one of my clients had this specific requirement to top up his SIP every year so that the kitty grows faster.
Assumptions
- Tenure is 10 years
- The expected annual returns = 13%
- Initial SIP amount = 10000
Case1: 10000 monthly SIP (normal) + 200000 per year lumpsum
The easiest way to handle this situation is to calculate the returns separately and then add them at the end of the period.
We know from the earlier chapter that a normal SIP of Rs10000 per month will give a fund value of 24,66,807 at the end of the 10th year. Refer to the calculations for normal SIPs, click here.
The second part of the calculation shows how the lumpsum contributions of 200000 per year are appreciated. I have shown 10 rows, wherein the first row calculates the returns for the full 10 years. The 2nd row calculates the interest for 9 years, the 3rd row for 8 years, etc.
The 200000 you deposit for the 1st year will give you the compound interest for the full 10 years. The deposit for the 2nd year will give the compound interest for the remaining 9 years, etc. When we sum up the total invested, it comes to 20,00,000 and the final fund value will be 41,62,862.
Now we need to sum up the fund values of SIPs and lumpsum. It works out to be
Total contributed = 12,00,000+20,00,000 = 32,00,000
Total Fund value = 24,66,807 + 41,62,862 = 66,29,669
Absolute returns = 2.071x
Case2: 10000 monthly step up SIP, annual step up increment = 20% + 200000 per year lumpsum
The total invested for step up SIP will be: 31,15,042 and its fund value will be: 52,95,837. Refer to the calculations for step-up SIPs, click here.
The Lumpsum calculations are exactly the same as we discussed above. The total invested, comes to 20,00,000 and the final fund value will be 41,62,862.
Grand Total invested = 31,15,042 + 20,00,000 = 51,15,042
The grand total fund value = 52,95,837 + 41,62,862 = 94,58,699
Absolute returns = 1.849x
Case2: 10000 monthly step-up SIP, annual step-up increment = 20% + 200000 lumpsum incremented by 10% every year.
The total invested for step up SIP will be: 31,15,042 and its fund value will be: 52,95,837. Refer to the calculations for step-up SIPs, click here.
The lumpsum is also incremented by 10% every year, this is the reason that year 2 has a contribution of 2,20,000, year 3 = 2,42,000, etc. The method by which the fund value is calculated remains the same, i.e. the first year’s contribution gets the compounding benefit for the entire 10 years, the 2nd installment in year 2 gets the benefit for only 9 years, etc.
The total invested = 31,87,484 and the final fund value = 60,32,880.
Grand Total invested = 31,15,042 + 31,87,484 = 63,02,526
Grand Total of Fund value = 52,95,837 + 60,32,880 = 1,13,28,717 ~ 1.13 crores.
With a humble beginning of Rs10000 per month and Rs200000 top-up per year, we managed to raise a total corpus above 1 crore. Incrementing your monthly and yearly outgo may not be an issue if you are upgrading your skills, getting promoted, or switching jobs with higher pay.
One thing that is obvious but missed is the importance of contributing capital early, that is when the compounding is much more powerful. Easier said than done, because most of them would not prefer to save/invest in their earlier years but would prefer to spend on travel, vacation, food, and other leisure.
Calculators are for illustrations only and do not represent actual returns.
Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.