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Deciding between a lumpsum and an SIP approach in Mutual Funds is crucial for NRIs aiming to invest in India. Here’s an in-depth, practical comparison of these two investment strategies with calculations to illustrate the potential returns under different Market conditions.
Consider an NRI investor, Raj, who has ₹5,00,000 ready for a one-time investment. Raj believes that the Indian equity market will perform well over the next 10 years, making lumpsum investment an attractive option.
Scenario:
Using the compound interest formula:
Where:
𝐴 - is the future value of the investment 𝑃 - is the initial investment (₹5,00,000) 𝑟 - is the rate of return (12%) 𝑛 - is the number of years (10)
So, after 10 years, Raj’s lumpsum investment would grow to approximately ₹15,52,900.
Key Insight:
A lumpsum investment allows Raj to maximize his Capital due to compounding. However, this approach carries higher risk, as the entire investment amount is exposed to market Volatility from day one.
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Now consider an NRI, Priya, who prefers a disciplined approach by Investing a fixed amount each month rather than a single large investment. Priya chooses an SIP of ₹10,000 every month in a similar equity mutual fund over 10 years.
Scenario:
Using the future value formula for SIPs:
Where:
𝐴 - is the future value of the SIP investment 𝑃 - is the monthly investment amount (₹10,000) 𝑟 - is the monthly rate of return (12% annually or 1% monthly) 𝑛 - is the number of months (120)
Plugging in the values:
This comes out to approximately:
A = 10,000 × 230.2199 = ₹23,02,199
Key Insight:
With an SIP, Priya benefits from rupee cost averaging, which helps reduce the impact of market volatility. Although her returns are slightly lower due to the staggered investment, her approach balances growth with lower risk.
To further differentiate the article, let’s dive into scenarios NRIs specifically face, such as exchange rate fluctuations and tax implications.
Let’s assume Raj and Priya live in the U.S., and they plan to remit their gains back after 10 years. When they invested, the USD/INR exchange rate was 74. If, after 10 years, the rate changes to 84, they would receive different returns in USD terms.
15,52,900 / 84 = $18,488
If the rate had stayed at 74, it would be worth $20,978 instead, showing the importance of exchange rates.
23,02,199 / 84 = $27,407
In this case, she would have received $31,106 if the rate stayed at 74, indicating that exchange rate fluctuations could notably affect NRI investments.
Key Insight:
Fluctuating exchange rates impact the final returns for NRIs, with a depreciating INR against the foreign currency benefitting the investor on repatriation.
Tax treatment for NRIs differs slightly, making this a significant Factor:
NRIs should factor in this tax structure while choosing between lumpsum and SIP. For example, if Raj’s lumpsum investment generated ₹5,00,000 in long-term gains, he’d pay 10% tax on the gains exceeding ₹1 lakh. Priya’s SIP investment, meanwhile, would likely have smaller individual Capital Gains, potentially reducing her Tax Liability each year.
Fund NAV Net Assets (Cr) Min SIP Investment 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 5 YR (%) 2023 (%) Kotak Small Cap Fund Growth ₹266.313
↑ 1.03 ₹17,593 1,000 -2.2 10.3 31 16.1 30.1 34.8 L&T Emerging Businesses Fund Growth ₹83.7283
↑ 0.94 ₹17,306 500 -2.1 8.4 27.8 23.1 30 46.1 ICICI Prudential Infrastructure Fund Growth ₹182.93
↑ 0.56 ₹6,779 100 -3.5 2.5 41.3 31 29.8 44.6 DSP BlackRock Small Cap Fund Growth ₹190.013
↑ 1.42 ₹16,147 500 -3.7 11.2 26 20 29.6 41.2 BOI AXA Manufacturing and Infrastructure Fund Growth ₹54.23
↑ 0.42 ₹519 1,000 -7.1 4.4 34.6 23.5 29.3 44.7 IDFC Infrastructure Fund Growth ₹50.145
↑ 0.66 ₹1,777 100 -10 1.5 48.6 26.6 29.2 50.3 Nippon India Power and Infra Fund Growth ₹337.889
↑ 0.77 ₹7,402 100 -8 -1.3 39.5 28.1 29 58 Edelweiss Mid Cap Fund Growth ₹95.534
↑ 0.91 ₹7,677 500 -0.7 14.9 42.4 22.7 28.9 38.4 ICICI Prudential Technology Fund Growth ₹204.07
↓ -4.00 ₹13,495 100 0.1 20.1 30.8 7.3 28.9 27.5 IDBI Small Cap Fund Growth ₹31.8163
↑ 0.41 ₹386 500 -2.4 12.9 39.9 22.2 28.8 33.4 Invesco India Infrastructure Fund Growth ₹62.44
↑ 0.74 ₹1,591 500 -5.9 1.5 44.5 25 28.7 51.1 Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 19 Nov 24 200 Crore
in Equity Category of mutual funds ordered based on 5 year calendar year returns.
Let’s consider hypothetical scenarios where the market behaves differently over the 10-year period to illustrate which approach might be more beneficial.
Best for investors with a high-risk tolerance and capital to invest upfront. Works well in rising markets and for investors who are not dependent on steady income from their investment.
By carefully considering market conditions, taxation, currency fluctuation, and personal Financial goals, NRIs can choose the strategy that aligns best with their objectives. Both approaches have their strengths, and an investor's unique circumstances should guide the final decision. This expanded article provides NRIs with a detailed analysis of both lumpsum and SIP approaches, highlighting practical examples, unique challenges, and calculations that few sources cover comprehensively.