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 1,111 monthly SIP for 40 years, a Rs 11,111 monthly SIP for 20 years and a Rs 22,222 monthly SIP for 10 years.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

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 1,111 monthly investment for 40 years, Rs 11,111 for 20 years or Rs 11,111 for 10 years?  

Scenario 1: Rs 1,111 monthly SIP for 40 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,111 for 40 years (480 months) will lead to a corpus of approximately Rs 1.32 crore. 

Scenario 2: Rs 11,111 monthly SIP for 20 years

Similarly, at the same expected return, a monthly SIP of Rs 11,111 for 10 years (120 months) will accumulate wealth to the tune of Rs 1.11 crore, as per calculations.

Scenario 3: Rs 22,222 monthly SIP for 10 years

 

Can you guess the corpus you will end up with with a Rs 22,222 monthly SIP for 10 years?

It will be approximately, Rs 51.63 lakh, calculations show. 

 

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
31 4,13,292 40,20,047 44,33,339
32 4,26,624 45,83,205 50,09,829
33 4,39,956 52,19,476 56,59,432
34 4,53,288 59,38,133 63,91,421
35 4,66,620 67,49,624 72,16,244
36 4,79,952 76,65,723 81,45,675
37 4,93,284 86,99,698 91,92,982
38 5,06,616 98,66,498 1,03,73,114
39 5,19,948 1,11,82,967 1,17,02,915
40 5,33,280 1,26,68,089 1,32,01,369

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
13 17,33,316 24,43,655 41,76,971
14 18,66,648 29,82,392 48,49,040
15 19,99,980 36,06,364 56,06,344
16 21,33,312 43,26,381 64,59,693
17 22,66,644 51,54,624 74,21,268
18 23,99,976 61,04,819 85,04,795
19 25,33,308 71,92,433 97,25,741
20 26,66,640 84,34,893

1,11,01,533

Power of Compounding | Scenario 3  

Period (in Years) Investment Return Corpus
1 2,66,664 17,985 2,84,649
2 5,33,328 72,070 6,05,398
3 7,99,992 1,66,835 9,66,827
4 10,66,656 3,07,438 13,74,094
5 13,33,320 4,99,692 18,33,012
6 15,99,984 7,50,149 23,50,133
7 18,66,648 10,66,189 29,32,837
8 21,33,312 14,56,131 35,89,443
9 23,99,976 19,29,347 43,29,323
10 26,66,640 24,96,399 51,63,039

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