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 two scenarios to understand how time matters in compounding: a Rs 1,234 monthly SIP for 35 years and a Rs 12,345 monthly SIP for 16 years.

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Can you guess the difference in the outcome in both scenarios at an expected annualised return of 12 per cent?

SIP Return Estimates | Which one will you choose: Rs 1,234 monthly investment for 35 years or Rs 12,345 for 15 years?  

Scenario 1: Rs 1,234 monthly SIP for 35 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,234 for 35 years (420 months) will lead to a corpus of approximately Rs 80.12 lakh (a principal of about Rs 5.18 lakh and an expected return of Rs 74.97 lakh). 

Scenario 2: Rs 12,345 monthly SIP for 16 years

Similarly, at the same expected return, a monthly SIP of Rs 12,345 for 16 years (192 months) will accumulate wealth to the tune of Rs 71.77 lakh, as per calculations (a principal of Rs 23.70 lakh and an expected return of Rs 48.07 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 14,808 999 15,807
2 29,616 4,002 33,618
3 44,424 9,264 53,688
4 59,232 17,072 76,304
5 74,040 27,748 1,01,788
6 88,848 41,656 1,30,504
7 1,03,656 59,206 1,62,862
8 1,18,464 80,860 1,99,324
9 1,33,272 1,07,138 2,40,410
10 1,48,080 1,38,626 2,86,706
11 1,62,888 1,75,987 3,38,875
12 1,77,696 2,19,963 3,97,659
13 1,92,504 2,71,395 4,63,899
14 2,07,312 3,31,228 5,38,540
15 2,22,120 4,00,527 6,22,647
16 2,36,928 4,80,493 7,17,421
17 2,51,736 5,72,478 8,24,214
18 2,66,544 6,78,008 9,44,552
19 2,81,352 7,98,800 10,80,152
20 2,96,160 9,36,789 12,32,949
21 3,10,968 10,94,156 14,05,124
22 3,25,776 12,73,360 15,99,136
23 3,40,584 14,77,169 18,17,753
24 3,55,392 17,08,704 20,64,096
25 3,70,200 19,71,482 23,41,682
26 3,85,008 22,69,464 26,54,472
27 3,99,816 26,07,117 30,06,933
28 4,14,624 29,89,470 34,04,094
29 4,29,432 34,22,192 38,51,624
30 4,44,240 39,11,674 43,55,914
31 4,59,048 44,65,111 49,24,159
32 4,73,856 50,90,617 55,64,473
33 4,88,664 57,97,330 62,85,994
34 5,03,472 65,95,550 70,99,022
35 5,18,280 74,96,882 80,15,162

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 1,48,140 9,991 1,58,131
2 2,96,280 40,037 3,36,317
3 4,44,420 92,682 5,37,102
4 5,92,560 1,70,791 7,63,351
5 7,40,700 2,77,594 10,18,294
6 8,88,840 4,16,731 13,05,571
7 10,36,980 5,92,301 16,29,281
8 11,85,120 8,08,925 19,94,045
9 13,33,260 10,71,811 24,05,071
10 14,81,400 13,86,826 28,68,226
11 16,29,540 17,60,580 33,90,120
12 17,77,680 22,00,523 39,78,203
13 19,25,820 27,15,050 46,40,870
14 20,73,960 33,13,620 53,87,580
15 22,22,100 40,06,891 62,28,991
16 23,70,240 48,06,874 71,77,114

 

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. 

ALSO READ: Small SIP, Big Impact: Rs 1,111 monthly SIP for 40 years, Rs 11,111 for 20 years or Rs 22,222 for 10 years, which do you think works best?

Read more on the power of compounding