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.

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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 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

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

Power of Compounding | Scenario 2

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

Power of Compounding | Scenario 3

Period (in Years) Investment Return Corpus
1 3,99,996 26,977 4,26,973
2 7,99,992 1,08,106 9,08,098
3 11,99,988 2,50,252 14,50,240
4 15,99,984 4,61,157 20,61,141
5 19,99,980 7,49,538 27,49,518
6 23,99,976 11,25,223 35,25,199
7 27,99,972 15,99,284 43,99,256

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