Small SIP, Big Impact: Rs 2,500 monthly SIP for 25 years, Rs 3,500 for 20 or Rs 4,500 for 15, which do you think works best?
Power of Compounding: A systematic investment plan (SIP) is a popular way of investing in mutual fund schemes of choice. This is because it lets investors park their funds towards a desired equity-related scheme gradually without having to arrange a large sum of money in one go. In this article, let's look at three scenarios to learn about the role time plays when it comes to compounding.
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A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds. This is because SIPs allow investors to park their surplus funds gradually in their chosen equity-related mutual fund scheme. This way, they not only get to stay committed to their investment strategies but are also able to harness the power of compounding. 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 2,500 monthly SIP for 25 years, a Rs 3,500 monthly SIP for 20 years and a Rs 4,500 monthly SIP for 15 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 2,500 monthly investment for 25 years, Rs 3,500 for 20 years or Rs 4,500 for 15 years?
Scenario 1: Rs 2,500 monthly SIP for 25 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,500 for 25 years (300 months) will lead to a corpus of approximately Rs 47.44 lakh (a principal of Rs 7.5 lakh and an estimated return of Rs 39.94 lakh).
Scenario 2: Rs 3,500 monthly SIP for 20 years
Similarly, at the same expected return, a monthly SIP of Rs 3,500 for 20 years (240 months) will accumulate wealth to the tune of Rs 34.97 lakh (a principal of Rs 8.4 lakh and an estimated return of Rs 26.57 lakh), as per calculations.
Scenario 3: Rs 4,500 monthly SIP for 15 years
Can you guess the corpus you will end up with with a Rs 4,500 monthly SIP for 15 years?
It will be approximately Rs 22.71 lakh (a principal of Rs 8.1 lakh and an estimated return of Rs 14.61 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 | 30,000 | 2,023 | 32,023 |
| 2 | 60,000 | 8,108 | 68,108 |
| 3 | 90,000 | 18,769 | 1,08,769 |
| 4 | 1,20,000 | 34,587 | 1,54,587 |
| 5 | 1,50,000 | 56,216 | 2,06,216 |
| 6 | 1,80,000 | 84,393 | 2,64,393 |
| 7 | 2,10,000 | 1,19,947 | 3,29,947 |
| 8 | 2,40,000 | 1,63,816 | 4,03,816 |
| 9 | 2,70,000 | 2,17,054 | 4,87,054 |
| 10 | 3,00,000 | 2,80,848 | 5,80,848 |
| 11 | 3,30,000 | 3,56,537 | 6,86,537 |
| 12 | 3,60,000 | 4,45,630 | 8,05,630 |
| 13 | 3,90,000 | 5,49,828 | 9,39,828 |
| 14 | 4,20,000 | 6,71,045 | 10,91,045 |
| 15 | 4,50,000 | 8,11,440 | 12,61,440 |
| 16 | 4,80,000 | 9,73,445 | 14,53,445 |
| 17 | 5,10,000 | 11,59,802 | 16,69,802 |
| 18 | 5,40,000 | 13,73,598 | 19,13,598 |
| 19 | 5,70,000 | 16,18,314 | 21,88,314 |
| 20 | 6,00,000 | 18,97,870 | 24,97,870 |
| 21 | 6,30,000 | 22,16,686 | 28,46,686 |
| 22 | 6,60,000 | 25,79,740 | 32,39,740 |
| 23 | 6,90,000 | 29,92,643 | 36,82,643 |
| 24 | 7,20,000 | 34,61,718 | 41,81,718 |
| 25 | 7,50,000 | 39,94,088 | 47,44,088 |
Power of Compounding | Scenario 2
| Period (in Years) | Investment | Return | Corpus |
| 1 | 42,000 | 2,833 | 44,833 |
| 2 | 84,000 | 11,351 | 95,351 |
| 3 | 1,26,000 | 26,277 | 1,52,277 |
| 4 | 1,68,000 | 48,422 | 2,16,422 |
| 5 | 2,10,000 | 78,702 | 2,88,702 |
| 6 | 2,52,000 | 1,18,150 | 3,70,150 |
| 7 | 2,94,000 | 1,67,926 | 4,61,926 |
| 8 | 3,36,000 | 2,29,343 | 5,65,343 |
| 9 | 3,78,000 | 3,03,875 | 6,81,875 |
| 10 | 4,20,000 | 3,93,187 | 8,13,187 |
| 11 | 4,62,000 | 4,99,152 | 9,61,152 |
| 12 | 5,04,000 | 6,23,883 | 11,27,883 |
| 13 | 5,46,000 | 7,69,759 | 13,15,759 |
| 14 | 5,88,000 | 9,39,463 | 15,27,463 |
| 15 | 6,30,000 | 11,36,016 | 17,66,016 |
| 16 | 6,72,000 | 13,62,824 | 20,34,824 |
| 17 | 7,14,000 | 16,23,723 | 23,37,723 |
| 18 | 7,56,000 | 19,23,037 | 26,79,037 |
| 19 | 7,98,000 | 22,65,639 | 30,63,639 |
| 20 | 8,40,000 | 26,57,018 | 34,97,018 |
Power of Compounding | Scenario 3
| Period (in Years) | Investment | Return | Corpus |
| 1 | 54,000 | 3,642 | 57,642 |
| 2 | 1,08,000 | 14,594 | 1,22,594 |
| 3 | 1,62,000 | 33,784 | 1,95,784 |
| 4 | 2,16,000 | 62,257 | 2,78,257 |
| 5 | 2,70,000 | 1,01,189 | 3,71,189 |
| 6 | 3,24,000 | 1,51,907 | 4,75,907 |
| 7 | 3,78,000 | 2,15,905 | 5,93,905 |
| 8 | 4,32,000 | 2,94,870 | 7,26,870 |
| 9 | 4,86,000 | 3,90,697 | 8,76,697 |
| 10 | 5,40,000 | 5,05,526 | 10,45,526 |
| 11 | 5,94,000 | 6,41,767 | 12,35,767 |
| 12 | 6,48,000 | 8,02,135 | 14,50,135 |
| 13 | 7,02,000 | 9,89,690 | 16,91,690 |
| 14 | 7,56,000 | 12,07,881 | 19,63,881 |
| 15 | 8,10,000 | 14,60,592 | 22,70,592 |
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
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