Power of SIP: What is Rs 1,000 for you? The cost of a movie outing; a dinner at your favourite restaurant; your pocket money for a few days; the cost of the modest gadget you want to buy; or probably, much less than to afford any of these things. Rs 1,000 looks like a small amount. However, many of us who earn more than 1,000 a day have excuses not to save money and invest. The excuses are: What difference will such a small saving make to my life? Even if I invest a small amount, I will get peanuts in returns. But wait! At least use some online calculator to know what a small investment as Rs 1,000 can give you. The estimated returns of such a small investment may shock people who underestimate the worth of Rs 1,000. Even such a small amount invested in a disciplined way for years can help one build a corpus of Rs 35.27 lakh.

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With Rs 12,000 a year for a total of over Rs 35 lakh, the journey may appear impossible, but one can get it even if they get that amount, even if their annual compound returns are 12 per cent in mutual funds through a systematic investment plan (SIP) strategy.

Know the calculations in this write-up, but before that, get to the basics to know how investments through SIP work and why long duration matters in getting sizeable compound returns.

What is SIP?

A SIP is an investment strategy popular in mutual fund investing.

Also Read | NPS vs mutual fund SIP: Which is a better investment plan for retirement? | Explained 

In SIP investing, you invest a certain amount every predecided investment cycle.

One can start SIP in one or more mutual fund schemes run by asset management companies (AMCs).

The minimum amount for investment through AMCs is Rs 100.

However, in most schemes, it is Rs 500.

Benefits of SIP  

SIP provides rupee cost averaging, which helps in mitigating market volatility.

E.g., when you invest through SIP, you purchase NAV every investment cycle.

If the NAV is priced at Rs 20 and you invest Rs 1000, you will purchase 50 NAVs.

If the NAV's price reduces to Rs 18.50 the next month, you will purchase 54 NAVs.

If the NAV's price jumps to Rs 21.50, you buy 46.51 NAVs.

Such fluctuations in NAV rates help with rupee cost averaging.

SIP provides the benefit of compounding, so you get returns on the overall amount and not just the principal.

If you invest Rs 10,000 in a scheme and get a 12 per cent return on it, your total investment increases to Rs 11,200.

If you get 12 per cent gains the next year, you will get it on Rs 11,200 and not on Rs 10,000.

SIP instills the habit of disciplined investing as you know that you have to invest a fixed amount every investment cycle. 

The Magic of Rs 1,000 SIP: How your corpus can grow to over Rs 35 lakh

If you invest Rs 1,000 every month through an SIP in a mutual fund and get 12 per cent returns every year, this is what you are estimated to get after 20, 25, and 30 years.

In 20 years, you will invest a total of Rs 2,40,000, your estimated returns will be Rs 7,59,148, and the total value of your investment will be Rs 9,99,148.

If you keep continuing to invest for the next five years, your investment will be Rs 3,00,000, your estimated returns will be Rs 15,97,635, and your total gains will be Rs 18,97,635.

If you continue investing for 30 years, your invested amount will be Rs 3,60,000, your estimated returns will be 31,69,914, and your total gains will be 35,29,914.

From 20 years to 30 years, you invest just Rs 120,000, but the difference in returns is (Rs 35,29,914-Rs 9,99,148 = Rs 2,530,766).

Such a vast difference in just 10 years is because SIPs give compound returns. 

Nehal Mota, Co-Founder & CEO, Finnovate, said, "If you assume a 20-year SIP period, at 12% returns CAGR, an investment of Rs 2.40 lakhs can make a corpus of Rs 9.99 lakh with wealth ratio of 4.16X. If you hike the SIP time period by five years to 25 years, the investment of Rs 3.00 lakhs grow into a corpus of Rs 18.98 lakh with wealth ratio of 6.33X.  If you further hike the SIP period by 5 years to 30 years, the investment of Rs 3.60 lakh transforms to Rs 35.30 lakh, a wealth ratio of 9.81X."

She further says, "The moral of the story is each time you increase your SIP by 5 years, your SIP corpus doubles and your wealth ratio grow by 50%."  

Thirty years is a vast period and one rarely invest for such a long time. But if one start investing at the age of 25, they can invest till 55.

"It is this growing wealth ratio that gives higher passive income over longer time periods; but for that you must start early to be able to sustain for longer," says Nehal.

Rs 1,000 investment a month should not be a big deal for most of us. 

(Disclaimer: Investments in mutual funds are subject to market risks. Do your own research or consult your advisor before investing.)