A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to utilise their surplus funds gradually in their chosen mutual fund scheme. This enables an investment to not only stay committed to their long-term investment strategy but also to harness the power of compounding. For the unversed, compounding grows investments exponentially over time, helping in creating substantial wealth over the years. At times, compounding yields surprising results, especially over longer periods. In this article, let’s consider two scenarios to understand how time matters in compounding: a Rs 2,500 monthly SIP for 30 years and a Rs 25,000 monthly SIP for 12 years.
Can you guess the difference in the outcome in both scenarios at an expected annualised return of 12 per cent?
SIP Return Estimates | Which one will you choose: Rs 2,500 monthly investment for 30 years or Rs 25,000 for 12 years?
Scenario 1: Rs 2,500 monthly SIP for 30 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,500 for 30 years (360 months) will lead to a corpus of approximately Rs 88.25 lakh (a Rs 9 lakh principal and an expected return of around Rs 79.25 lakh).
Scenario 2: Rs 25,000 monthly SIP for 12 years
Similarly, at the same expected return, a monthly SIP of Rs 25,000 for 12 years (144 months) will accumulate wealth to the tune of Rs 80.56 lakh, as per calculations (a Rs 36 lakh principal and an expected return of Rs 44.56 lakh).
Now, let’s look at these estimates in detail (figures in rupees):
Power of Compounding | Scenario 1
| Period (in Years) | Investment | Return | Corpus |
| 1 | 30,000 | 2,023 | 32,023 |
| 2 | 60,000 | 8,108 | 68,108 |
| 3 | 90,000 | 18,769 | 1,08,769 |
| 4 | 1,20,000 | 34,587 | 1,54,587 |
| 5 | 1,50,000 | 56,216 | 2,06,216 |
| 6 | 1,80,000 | 84,393 | 2,64,393 |
| 7 | 2,10,000 | 1,19,947 | 3,29,947 |
| 8 | 2,40,000 | 1,63,816 | 4,03,816 |
| 9 | 2,70,000 | 2,17,054 | 4,87,054 |
| 10 | 3,00,000 | 2,80,848 | 5,80,848 |
| 11 | 3,30,000 | 3,56,537 | 6,86,537 |
| 12 | 3,60,000 | 4,45,630 | 8,05,630 |
| 13 | 3,90,000 | 5,49,828 | 9,39,828 |
| 14 | 4,20,000 | 6,71,045 | 10,91,045 |
| 15 | 4,50,000 | 8,11,440 | 12,61,440 |
| 16 | 4,80,000 | 9,73,445 | 14,53,445 |
| 17 | 5,10,000 | 11,59,802 | 16,69,802 |
| 18 | 5,40,000 | 13,73,598 | 19,13,598 |
| 19 | 5,70,000 | 16,18,314 | 21,88,314 |
| 20 | 6,00,000 | 18,97,870 | 24,97,870 |
| 21 | 6,30,000 | 22,16,686 | 28,46,686 |
| 22 | 6,60,000 | 25,79,740 | 32,39,740 |
| 23 | 6,90,000 | 29,92,643 | 36,82,643 |
| 24 | 7,20,000 | 34,61,718 | 41,81,718 |
| 25 | 7,50,000 | 39,94,088 | 47,44,088 |
| 26 | 7,80,000 | 45,97,780 | 53,77,780 |
| 27 | 8,10,000 | 52,81,841 | 60,91,841 |
| 28 | 8,40,000 | 60,56,462 | 68,96,462 |
| 29 | 8,70,000 | 69,33,129 | 78,03,129 |
| 30 | 9,00,000 | 79,24,784 | 88,24,784 |
Power of Compounding | Scenario 2
| Period (in Years) | Investment | Return | Corpus |
| 1 | 3,00,000 | 20,233 | 3,20,233 |
| 2 | 6,00,000 | 81,080 | 6,81,080 |
| 3 | 9,00,000 | 1,87,691 | 10,87,691 |
| 4 | 12,00,000 | 3,45,871 | 15,45,871 |
| 5 | 15,00,000 | 5,62,159 | 20,62,159 |
| 6 | 18,00,000 | 8,43,926 | 26,43,926 |
| 7 | 21,00,000 | 11,99,475 | 32,99,475 |
| 8 | 24,00,000 | 16,38,164 | 40,38,164 |
| 9 | 27,00,000 | 21,70,538 | 48,70,538 |
| 10 | 30,00,000 | 28,08,477 | 58,08,477 |
| 11 | 33,00,000 | 35,65,370 | 68,65,370 |
| 12 | 36,00,000 | 44,56,304 | 80,56,304 |
SIP & Compounding | What is compounding and how does it work?
For the sake of simplicity, one can understand compounding in SIPs as ‘return on return’, wherein initial returns get added up to the principal to boost future returns, and so on.
Compounding helps in generating returns on both the original principal and the accumulated interest gradually over time, contributing to exponential growth over longer periods.
This approach eliminates the need for a lump sum investment, making it convenient for many individuals—especially the salaried—to invest in their preferred mutual funds. Read more on the power of compounding
