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 not only gets to stay committed to their investment strategy but is also able 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 1,111 monthly SIP for 30 years and a Rs 11,111 monthly SIP for 12 years.

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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 1,111 monthly investment for 30 years or Rs 11,111 for 12 years?  

Scenario 1: Rs 1,111 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,111 for 30 years (360 months) will lead to a corpus of approximately Rs 39.22 lakh (with an investment of Rs 3,99,960 and an expected return of Rs 35.22 lakh). 

Scenario 2: Rs 11,111 monthly SIP for 12 years

Similarly, at the same expected return, a monthly SIP of Rs 11,111 for 12 years (144 months) will accumulate wealth to the tune of Rs 35.81 lakh, as per calculations (with an investment of Rs 15,99,984 and an expected return of Rs 19.81 lakh).

ALSO READ: Small SIP, Big Impact: Rs 3,000 monthly SIP for 24 years, Rs 13,000 for 12 years or Rs 30,000 for 6 years, which do you think works best?

Now, let's look at these estimates in detail (figures in rupees): 

Power of Compounding | Scenario 1 

Period (in Years) Investment Return Corpus
1 13,332 899 14,231
2 26,664 3,603 30,267
3 39,996 8,341 48,337
4 53,328 15,371 68,699
5 66,660 24,982 91,642
6 79,992 37,504 1,17,496
7 93,324 53,305 1,46,629
8 1,06,656 72,800 1,79,456
9 1,19,988 96,459 2,16,447
10 1,33,320 1,24,809 2,58,129
11 1,46,652 1,58,445 3,05,097
12 1,59,984 1,98,038 3,58,022
13 1,73,316 2,44,344 4,17,660
14 1,86,648 2,98,212 4,84,860
15 1,99,980 3,60,604 5,60,584
16 2,13,312 4,32,599 6,45,911
17 2,26,644 5,15,416 7,42,060
18 2,39,976 6,10,427 8,50,403
19 2,53,308 7,19,179 9,72,487
20 2,66,640 8,43,413 11,10,053
21 2,79,972 9,85,095 12,65,067
22 2,93,304 11,46,436 14,39,740
23 3,06,636 13,29,931 16,36,567
24 3,19,968 15,38,387 18,58,355
25 3,33,300 17,74,973 21,08,273
26 3,46,632 20,43,253 23,89,885
27 3,59,964 23,47,250 27,07,214
28 3,73,296 26,91,492 30,64,788
29 3,86,628 30,81,083 34,67,711
30 3,99,960 35,21,774 39,21,734

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

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