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 equity-related mutual fund scheme. This way, an investor gets to stay committed to their investment strategy and 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 7,777 monthly SIP for 20 years and a monthly SIP of Rs 11,111 for 17 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 7,777 monthly investment for 20 years or Rs 11,111 for 17 years?
Scenario 1: Rs 7,777 monthly SIP for 20 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 7,777 for 20 years (240 months) will lead to a corpus of approximately Rs 77.70 lakh (a principal of Rs 18,66,480 and an estimated return of approximately Rs 59.04 lakh).
Scenario 2: Rs 11,111 monthly SIP for 17 years
Similarly, at the same expected return, a monthly SIP of Rs 11,111 for 17 years (204 months) will accumulate wealth to the tune of Rs 74.21 lakh (a principal of Rs 22,66,644 and an estimated return of Rs 51.55 lakh), as per calculations.
Now, let’s look at these estimates in detail (figures in rupees):
Power of Compounding | Scenario 1
| Period (in Years) | Investment | Return | Corpus |
| 1 | 93,324 | 6,294 | 99,618 |
| 2 | 1,86,648 | 25,222 | 2,11,870 |
| 3 | 2,79,972 | 58,387 | 3,38,359 |
| 4 | 3,73,296 | 1,07,594 | 4,80,890 |
| 5 | 4,66,620 | 1,74,876 | 6,41,496 |
| 6 | 5,59,944 | 2,62,528 | 8,22,472 |
| 7 | 6,53,268 | 3,73,133 | 10,26,401 |
| 8 | 7,46,592 | 5,09,600 | 12,56,192 |
| 9 | 8,39,916 | 6,75,211 | 15,15,127 |
| 10 | 9,33,240 | 8,73,661 | 18,06,901 |
| 11 | 10,26,564 | 11,09,115 | 21,35,679 |
| 12 | 11,19,888 | 13,86,267 | 25,06,155 |
| 13 | 12,13,212 | 17,10,405 | 29,23,617 |
| 14 | 13,06,536 | 20,87,486 | 33,94,022 |
| 15 | 13,99,860 | 25,24,228 | 39,24,088 |
| 16 | 14,93,184 | 30,28,194 | 45,21,378 |
| 17 | 15,86,508 | 36,07,912 | 51,94,420 |
| 18 | 16,79,832 | 42,72,989 | 59,52,821 |
| 19 | 17,73,156 | 50,34,250 | 68,07,406 |
| 20 | 18,66,480 | 59,03,893 | 77,70,373 |
Power of Compounding | Scenario 2
| Period (in Years) | Investment | Return | Corpus |
| 1 | 1,33,332 | 8,992 | 1,42,324 |
| 2 | 2,66,664 | 36,035 | 3,02,699 |
| 3 | 3,99,996 | 83,417 | 4,83,413 |
| 4 | 5,33,328 | 1,53,719 | 6,87,047 |
| 5 | 6,66,660 | 2,49,846 | 9,16,506 |
| 6 | 7,99,992 | 3,75,074 | 11,75,066 |
| 7 | 9,33,324 | 5,33,095 | 14,66,419 |
| 8 | 10,66,656 | 7,28,066 | 17,94,722 |
| 9 | 11,99,988 | 9,64,674 | 21,64,662 |
| 10 | 13,33,320 | 12,48,199 | 25,81,519 |
| 11 | 14,66,652 | 15,84,593 | 30,51,245 |
| 12 | 15,99,984 | 19,80,560 | 35,80,544 |
| 13 | 17,33,316 | 24,43,655 | 41,76,971 |
| 14 | 18,66,648 | 29,82,392 | 48,49,040 |
| 15 | 19,99,980 | 36,06,364 | 56,06,344 |
| 16 | 21,33,312 | 43,26,381 | 64,59,693 |
| 17 | 22,66,644 | 51,54,624 | 74,21,268 |
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
