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.

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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 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. 

ALSO READ: Small SIP, Big Impact: Rs 3,000 monthly SIP for 24 years, Rs 13,000 for 12 years or Rs 30,000 for 6 years, which do you think works best?

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

ALSO READ: Small SIP, Big Impact: Rs 4,444 monthly SIP for 30 years, Rs 6,666 for 25 or Rs 9,999 for 20, which do you think works best?

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