Understanding Lump Sum Investments
Our Lump Sum Calculator helps you visualize the power of compounding interest on your one-time investment.
What is a Lump Sum Investment?
A lump sum investment refers to a single, one-time investment of a significant amount of money. Unlike recurring investments (like SIPs), a lump sum is deposited all at once, and its growth is then driven by compounding interest over time.
This approach is often used when an individual has received a large sum of money, such as a bonus, inheritance, or maturity proceeds from another investment, and wishes to invest it for long-term growth.
How Lump Sum Growth is Calculated
The growth of a lump sum investment is primarily determined by three factors:
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Initial Investment (P)The principal amount invested at the beginning.
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Annual Interest Rate (R)The rate at which your investment earns interest annually.
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Investment Period (N)The total number of years for which the investment is held.
The formula for future value with compound interest is:
$$FV = P \times (1 + R)^N$$
Where:
- $FV$ = Future Value of the Investment
- $P$ = Initial Principal Investment
- $R$ = Annual Interest Rate (as a decimal, e.g., 7% = 0.07)
- $N$ = Number of Years the money is invested
Understanding the Investment Growth Schedule
The growth schedule provides a year-by-year breakdown of your lump sum investment. It shows the starting balance for each year, the interest earned during that year, and the ending balance, clearly illustrating the effect of compounding interest.
This schedule helps you see exactly how your money multiplies over time, with interest being earned not just on the initial principal but also on the accumulated interest from previous years.