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 direct their surplus funds steadily towards 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 two different scenarios to understand how time matters in compounding: a Rs 5,000 monthly SIP for 15 years and a Rs 10,000 monthly SIP for 10 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 5,000 monthly investment for 15 years or Rs 10,000 for 10 years?
Scenario 1: Rs 5,000 monthly SIP for 15 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 10,000 for 15 years (180 months) will lead to a corpus of approximately Rs 25.23 lakh (a principal of Rs 9 lakh and an expected return of Rs 16.23 lakh).
Scenario 2: Rs 10,000 monthly SIP for 10 years
Similarly, at the same expected return, a monthly SIP of Rs 10,000 for 10 years (120 months) will accumulate wealth of almost Rs 23.23 lakh, as per calculations (a principal of Rs 12 lakh and an expected return of Rs 11.23 lakh).
ALSO READ: 10 MF schemes that have turned Rs 1 lakh into Rs 3.88 lakh-5.52 lakh in 10 years; invested in any?
It is worth noticing that in the bigger SIP, the investor is actually putting in more money over a two-thirds of the time period and yet reaching a smaller outcome.
Now, let’s look at these estimates in detail (figures in rupees):
SIP Estimates at 12% Expected Annualised Return | Scenario 1
| Year | Investment | Return | Corpus |
| 1 | 60,000 | 4,047 | 64,047 |
| 2 | 1,20,000 | 16,216 | 1,36,216 |
| 3 | 1,80,000 | 37,538 | 2,17,538 |
| 4 | 2,40,000 | 69,174 | 3,09,174 |
| 5 | 3,00,000 | 1,12,432 | 4,12,432 |
| 6 | 3,60,000 | 1,68,785 | 5,28,785 |
| 7 | 4,20,000 | 2,39,895 | 6,59,895 |
| 8 | 4,80,000 | 3,27,633 | 8,07,633 |
| 9 | 5,40,000 | 4,34,108 | 9,74,108 |
| 10 | 6,00,000 | 5,61,695 | 11,61,695 |
| 11 | 6,60,000 | 7,13,074 | 13,73,074 |
| 12 | 7,20,000 | 8,91,261 | 16,11,261 |
| 13 | 7,80,000 | 10,99,656 | 18,79,656 |
| 14 | 8,40,000 | 13,42,090 | 21,82,090 |
| 15 | 9,00,000 | 16,22,880 | 25,22,880 |
SIP Estimates at 12% Expected Annualised Return | Scenario 2
| Year | Investment | Return | Corpus |
| 1 | 1,20,000 | 8,093 | 1,28,093 |
| 2 | 2,40,000 | 32,432 | 2,72,432 |
| 3 | 3,60,000 | 75,076 | 4,35,076 |
| 4 | 4,80,000 | 1,38,348 | 6,18,348 |
| 5 | 6,00,000 | 2,24,864 | 8,24,864 |
| 6 | 7,20,000 | 3,37,570 | 10,57,570 |
| 7 | 8,40,000 | 4,79,790 | 13,19,790 |
| 8 | 9,60,000 | 6,55,266 | 16,15,266 |
| 9 | 10,80,000 | 8,68,215 | 19,48,215 |
| 10 | 12,00,000 | 11,23,391 | 23,23,391 |
ALSO READ: Power of Rs 5,000 SIP: How soon can you generate Rs 1.5 crore corpus with just Rs 5,000 monthly investment?
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
ALSO READ: Top 10 SBI Mutual Funds With Up to 29% Returns in 5 Years: Rs 1,50,000 one-time investment in No. 1 scheme has turned into Rs 5,30,000
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