Rs 2,100 monthly SIP for 40 years or Rs 5,100 in 20 years, which do you think works better at same annualised return?
Power of Compounding: An SIP or systematic investment plan is a popular way of investing in mutual fund schemes of choice, as it enables investors to channelise their surplus funds towards a desired equity-related scheme gradually. This way, the investor does not have to arrange funds at a single time. Multitudes of salaried individuals find SIPs both convenient and practical for investing in their favourite mutual fund products, in contrast to lump sum investments which require a large pile of surplus funds at once. It goes without saying that starting early and investing for a long time works best, as it helps the investor park a larger sum to the scheme while tapping the true power of compounding.
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 look at two scenarios to understand how time matters in compounding: a Rs 2,100 monthly SIP for 20 years and a Rs 5,100 monthly SIP for 10 years. Can you guess the difference in the outcome in both at a modest expected annualised return of 12 per cent?
SIP Return Estimates | Which one will you choose, Rs 2,100 monthly investment for 20 years or Rs 5,100 for 10?
Scenario 1: Rs 2,100 monthly SIP for 20 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,100 for 20 years (240 months) will lead to a corpus of approximately Rs 20.98 lakh.
Scenario 2: Rs 5,100 monthly SIP for 10 years
Similarly, at the same expected return, a monthly SIP of Rs 5,100 for 10 years (120 months) will accumulate wealth to the tune of approximately Rs 11.85 lakh, as per calculations.
Now, let's look at these estimates in detail (figures in rupees):
Power of Compounding | Scenario 1: Rs 2,100 monthly SIP for 20 years
| Period (in Years) | Investment | Return | Corpus |
| 1 | 25,200 | 1,700 | 26,900 |
| 2 | 50,400 | 6,811 | 57,211 |
| 3 | 75,600 | 15,766 | 91,366 |
| 4 | 1,00,800 | 29,053 | 1,29,853 |
| 5 | 1,26,000 | 47,221 | 1,73,221 |
| 6 | 1,51,200 | 70,890 | 2,22,090 |
| 7 | 1,76,400 | 1,00,756 | 2,77,156 |
| 8 | 2,01,600 | 1,37,606 | 3,39,206 |
| 9 | 2,26,800 | 1,82,325 | 4,09,125 |
| 10 | 2,52,000 | 2,35,912 | 4,87,912 |
| 11 | 2,77,200 | 2,99,491 | 5,76,691 |
| 12 | 3,02,400 | 3,74,330 | 6,76,730 |
| 13 | 3,27,600 | 4,61,855 | 7,89,455 |
| 14 | 3,52,800 | 5,63,678 | 9,16,478 |
| 15 | 3,78,000 | 6,81,610 | 10,59,610 |
| 16 | 4,03,200 | 8,17,694 | 12,20,894 |
| 17 | 4,28,400 | 9,74,234 | 14,02,634 |
| 18 | 4,53,600 | 11,53,822 | 16,07,422 |
| 19 | 4,78,800 | 13,59,383 | 18,38,183 |
| 20 | 5,04,000 | 15,94,211 | 20,98,211 |
Power of Compounding | Scenario 2: Rs 5,100 monthly SIP for 10 years
| Period (in Years) | Investment | Return | Corpus |
| 1 | 61,200 | 4,128 | 65,328 |
| 2 | 1,22,400 | 16,540 | 1,38,940 |
| 3 | 1,83,600 | 38,289 | 2,21,889 |
| 4 | 2,44,800 | 70,558 | 3,15,358 |
| 5 | 3,06,000 | 1,14,680 | 4,20,680 |
| 6 | 3,67,200 | 1,72,161 | 5,39,361 |
| 7 | 4,28,400 | 2,44,693 | 6,73,093 |
| 8 | 4,89,600 | 3,34,185 | 8,23,785 |
| 9 | 5,50,800 | 4,42,790 | 9,93,590 |
| 10 | 6,12,000 | 5,72,929 | 11,84,929 |
SIP & Compounding | What is compounding and how does it work?
Simply put, compounding helps in generating returns on both the original principal and the accumulated interest gradually over time, contributing to exponential growth over longer periods.
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.
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
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