Small SIP, Big Impact: Rs 11,111 monthly investment for 15 years, Rs 22,222 for 10 years or Rs 33,333 for 7 years, which do you think works best?

A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to park their surplus cash steadily in 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 three scenarios to understand how time matters in compounding: a Rs 11,111 monthly SIP for 15 years, Rs 22,222 for 10 years and Rs 33,333 for 7 years.

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 11,111 monthly investment for 15 years, Rs 22,222 for 10 years or 33,333 for 7 years?  

Scenario 1: Rs 11,111 monthly SIP for 15 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 11,111 for 15 years (180 months) will lead to a corpus of approximately Rs 56.06 lakh (a principal of almost Rs 20 lakh and an expected return of Rs 36.06 lakh). 

Scenario 2: Rs 22,222 monthly SIP for 10 years

Similarly, at the same expected return, a monthly SIP of Rs 22,222 for 10 years (120 months) will accumulate wealth to the tune of Rs 51.63 lakh, as per calculations (a principal of Rs 26.67 lakh and an expected return of Rs 24.97 lakh).

Scenario 3: Rs 33,333 monthly SIP for 7 years

Similarly, at the same expected return, a monthly SIP of Rs 33,333 for 7 years (84 months) will accumulate wealth to the tune of Rs 43.99 lakh, as per calculations (a principal of almost Rs 28 lakh and an expected return of Rs 15.99 lakh).

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

Power of Compounding | Scenario 1

Power of Compounding | Scenario 2

Power of Compounding | Scenario 3

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