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 three scenarios to understand how time matters in compounding: a Rs 1,100 monthly SIP for 30 years, a Rs 11,000 monthly SIP for 12 years and a Rs 21,000 monthly SIP for 8 years.

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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 1,100 monthly investment for 30 years, Rs 11,000 for 12 years or Rs 21,000 for 8 years?  

Scenario 1: Rs 1,100 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,100 for 30 years (360 months) will lead to a corpus of approximately Rs 38.83 lakh (a principal of Rs 3.96 lakh and an estimated return of Rs 34.87 lakh). 

Scenario 2: Rs 11,000 monthly SIP for 12 years

Similarly, at the same expected return, a monthly SIP of Rs 11,000 for 15 years (180 months) will accumulate wealth to the tune of Rs 35.45 lakh (a principal of Rs 15.84 lakh and an estimated return of Rs 19.61 lakh), as per calculations.

Scenario 3: Rs 21,000 monthly SIP for 8 years

Can you guess the corpus you will end up with with a Rs 21,000 monthly SIP for 8 years?

It will be approximately, Rs 33.92 lakh, calculations show. 

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 13,200 890 14,090
2 26,400 3,568 29,968
3 39,600 8,258 47,858
4 52,800 15,218 68,018
5 66,000 24,735 90,735
6 79,200 37,133 1,16,333
7 92,400 52,777 1,45,177
8 1,05,600 72,079 1,77,679
9 1,18,800 95,504 2,14,304
10 1,32,000 1,23,573 2,55,573
11 1,45,200 1,56,876 3,02,076
12 1,58,400 1,96,077 3,54,477
13 1,71,600 2,41,924 4,13,524
14 1,84,800 2,95,260 4,80,060
15 1,98,000 3,57,034 5,55,034
16 2,11,200 4,28,316 6,39,516
17 2,24,400 5,10,313 7,34,713
18 2,37,600 6,04,383 8,41,983
19 2,50,800 7,12,058 9,62,858
20 2,64,000 8,35,063 10,99,063
21 2,77,200 9,75,342 12,52,542
22 2,90,400 11,35,086 14,25,486
23 3,03,600 13,16,763 16,20,363
24 3,16,800 15,23,156 18,39,956
25 3,30,000 17,57,399 20,87,399
26 3,43,200 20,23,023 23,66,223
27 3,56,400 23,24,010 26,80,410
28 3,69,600 26,64,843 30,34,443
29 3,82,800 30,50,577 34,33,377
30 3,96,000 34,86,905 38,82,905

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 1,32,000 8,903 1,40,903
2 2,64,000 35,675 2,99,675
3 3,96,000 82,584 4,78,584
4 5,28,000 1,52,183 6,80,183
5 6,60,000 2,47,350 9,07,350
6 7,92,000 3,71,327 11,63,327
7 9,24,000 5,27,769 14,51,769
8 10,56,000 7,20,792 17,76,792
9 11,88,000 9,55,037 21,43,037
10 13,20,000 12,35,730 25,55,730
11 14,52,000 15,68,763 30,20,763
12 15,84,000 19,60,774 35,44,774

Power of Compounding | Scenario 3

Period (in Years) Investment Return Corpus
1 2,52,000 16,996 2,68,996
2 5,04,000 68,107 5,72,107
3 7,56,000 1,57,661 9,13,661
4 10,08,000 2,90,532 12,98,532
5 12,60,000 4,72,214 17,32,214
6 15,12,000 7,08,898 22,20,898
7 17,64,000 10,07,559 27,71,559
8 20,16,000 13,76,058 33,92,058

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