Lumpsum is investing your entire amount in one go. It is the oldest and one of the most popular ways of investing in mutual funds. Since you commit larger sum of money in lumpsum investments the absolute return of lumpsum investments tends to be higher over long investment tenures due to the power of compounding.
What is lumpsum calculator?
Lumpsum calculator can tell you the point to point returns for lumpsum investments. In a mutual fund lumpsum calculator, you usually enter the investment amount, tenure or start date / end date and expected annualized return on investment. The calculator can tell you how much wealth you can create over a certain investment tenure. One of the most important factors in wealth creation is the power of compounding. A lumpsum calculator uses compounding to calculate, how much corpus you will accumulate at the end of your investment tenure.
Power of compounding in mutual funds
In mutual funds (growth option), the profits made by the mutual fund schemes are re-invested in the scheme. You earn profit on profits by re-investing the profits. Over long investment horizons, the re-invested profits can be much larger than your initial investment. Your investment can grow exponentially over long investment tenures due to the power of compounding.
Compounding formula used by lumpsum calculators
As mentioned before lumpsum calculator uses compounding to calculate wealth creation over a certain investment tenure. The compounding formula is as follows:-
FV = I X (1 + r %) n
Where,
FV = Future Value of Investment
I = Investment Amount
r = annualized return on investment
n = investment tenure in years
Let us illustrate how mutual fund lumpsum calculator works with an example. Suppose you invested Rs 5 lakhs in a mutual fund scheme. Let us assume that the scheme will give 10% annualized returns. How much corpus will you accumulate after 10 years?
Corpus = 5 X (1 + 10 %) 10 = 12.97 lakhs
Lumpsum calculators for mutual fund schemes
The lumpsum calculator discussed above is a general calculator which tells you how much wealth you can create over a certain period for a certain return on investment. There are lumpsum calculators which can tell you how much wealth you could have created by invested in a certain mutual fund scheme over a certain period. In this calculator, you will have to enter the investment amount, start date and end date of investment. The calculator will use the following formula to calculate the corpus.
Corpus = Investment Amount X {scheme NAV (end date) ÷ scheme NAV (start date)}
Here NAV is the mutual fund NAV of the scheme on the respective dates. Since the lumpsum calculator is calculating point to point returns, the start and end dates are very important factors for wealth creation. Longer the gap between start and end dates i.e. longer investment tenure, higher is the wealth creation due to power of compounding. Market timing is also an important factor in point to point returns; if you buy your mutual fund units at a low price (e.g. market correction) and / or sell your units at a high price (e.g. bull market peak), your return will be higher.
Conclusion
In this article, we have discussed how lumpsum calculator works. It can help you get a sense of wealth created by lumpsum investments in mutual funds over long investment tenures.