SIP & Compounding, Why Long Term Investment Matters: A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to channelise their surplus funds steadily in their mutual fund scheme of choice. This enables an investor to not only stay committed to their long-term investment strategy but also to maximise the benefit 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 three scenarios to understand how time matters in compounding: a Rs 2,500 monthly SIP for 25 years, a Rs 3,125 monthly SIP for 20 years and Rs a Rs 5,208 monthly SIP for 12 years.
Can you guess the difference in the outcome in all three scenarios at an expected annualised return of 12 per cent?
SIP Return Estimates | Which one will you choose: Rs 2,500 monthly investment for 25 years, Rs 3,125 for 20 years or Rs 5,208 for 12 years?
Scenario 1: Rs 2,500 monthly SIP for 25 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,500 for 25 years (300 months) will lead to a corpus of approximately Rs 47.44 lakh (a principal of Rs 7.5 lakh and an expected return of Rs 39.94 lakh).
Scenario 2: Rs 3,125 monthly SIP for 20 years
Similarly, at the same expected return, a monthly SIP of Rs 3,125 for 20 years (240 months) will accumulate wealth of approximately Rs 31.22 lakh, as per calculations (a principal of Rs 7.5 lakh and an expected return of Rs 23.72 lakh).
Scenario 3: Rs 5,208 monthly SIP for 12 years
Similarly, at the same expected return, a monthly SIP of Rs 5,208 for 12 years (144 months) will accumulate wealth to the tune of Rs 16.78 lakh, as per calculations (a principal of almost Rs 7.5 lakh and an expected return of Rs 9.28 lakh).
ALSO READ: Power of Rs 7,000 SIP: How can you generate Rs 5 crore corpus with just Rs 7,000 monthly investment?
It is worth noticing that in all three examples, nearly the same amount is invested in different timeframes (Rs 7.5 lakh in two and Rs 7,49,952 in one).
Now, let’s look at these estimates in detail (figures in rupees):
SIP Estimates at 12% Expected Annualised Return | Scenario 1
| Year | Investment (Rs) | Return (Rs) | Corpus (Rs) |
| 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 |
SIP Estimates at 12% Expected Annualised Return | Scenario 2
| Year | Investment (Rs) | Return (Rs) | Corpus (Rs) |
| 1 | 37,500 | 2,529 | 40,029 |
| 2 | 75,000 | 10,135 | 85,135 |
| 3 | 1,12,500 | 23,461 | 1,35,961 |
| 4 | 1,50,000 | 43,234 | 1,93,234 |
| 5 | 1,87,500 | 70,270 | 2,57,770 |
| 6 | 2,25,000 | 1,05,491 | 3,30,491 |
| 7 | 2,62,500 | 1,49,934 | 4,12,434 |
| 8 | 3,00,000 | 2,04,771 | 5,04,771 |
| 9 | 3,37,500 | 2,71,317 | 6,08,817 |
| 10 | 3,75,000 | 3,51,060 | 7,26,060 |
| 11 | 4,12,500 | 4,45,671 | 8,58,171 |
| 12 | 4,50,000 | 5,57,038 | 10,07,038 |
| 13 | 4,87,500 | 6,87,285 | 11,74,785 |
| 14 | 5,25,000 | 8,38,806 | 13,63,806 |
| 15 | 5,62,500 | 10,14,300 | 15,76,800 |
| 16 | 6,00,000 | 12,16,807 | 18,16,807 |
| 17 | 6,37,500 | 14,49,753 | 20,87,253 |
| 18 | 6,75,000 | 17,16,998 | 23,91,998 |
| 19 | 7,12,500 | 20,22,892 | 27,35,392 |
| 20 | 7,50,000 | 23,72,337 | 31,22,337 |
SIP Estimates at 12% Expected Annualised Return | Scenario 3
| Year | Investment (Rs) | Return (Rs) | Corpus (Rs) |
| 1 | 62,496 | 4,215 | 66,711 |
| 2 | 1,24,992 | 16,891 | 1,41,883 |
| 3 | 1,87,488 | 39,100 | 2,26,588 |
| 4 | 2,49,984 | 72,052 | 3,22,036 |
| 5 | 3,12,480 | 1,17,109 | 4,29,589 |
| 6 | 3,74,976 | 1,75,807 | 5,50,783 |
| 7 | 4,37,472 | 2,49,875 | 6,87,347 |
| 8 | 4,99,968 | 3,41,262 | 8,41,230 |
| 9 | 5,62,464 | 4,52,166 | 10,14,630 |
| 10 | 6,24,960 | 5,85,062 | 12,10,022 |
| 11 | 6,87,456 | 7,42,738 | 14,30,194 |
| 12 | 7,49,952 | 9,28,337 | 16,78,289 |
ALSO READ: PPF For Regular Income: How can you get Rs 60,000/month tax-free income from Public Provident Fund?
Mutual Fund SIP & Compounding | What compounding really is and how it works
To put it in simple words, 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 an investor generate 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
