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 mutual fund scheme. This enables an investment to not only stay committed to their long-term investment strategy but also 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 consider two scenarios to understand how time matters in compounding: a Rs 2,500 monthly SIP for 30 years and a Rs 25,000 monthly SIP for 12 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 2,500 monthly investment for 30 years or Rs 25,000 for 12 years?  

Scenario 1: Rs 2,500 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,500 for 30 years (360 months) will lead to a corpus of approximately Rs 88.25 lakh (a Rs 9 lakh principal and an expected return of around Rs 79.25 lakh). 

Scenario 2: Rs 25,000 monthly SIP for 12 years

Similarly, at the same expected return, a monthly SIP of Rs 25,000 for 12 years (144 months) will accumulate wealth to the tune of Rs 80.56 lakh, as per calculations (a Rs 36 lakh principal and an expected return of Rs 44.56 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 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
26 7,80,000 45,97,780 53,77,780
27 8,10,000 52,81,841 60,91,841
28 8,40,000 60,56,462 68,96,462
29 8,70,000 69,33,129 78,03,129
30 9,00,000 79,24,784 88,24,784

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 3,00,000 20,233 3,20,233
2 6,00,000 81,080 6,81,080
3 9,00,000 1,87,691 10,87,691
4 12,00,000 3,45,871 15,45,871
5 15,00,000 5,62,159 20,62,159
6 18,00,000 8,43,926 26,43,926
7 21,00,000 11,99,475 32,99,475
8 24,00,000 16,38,164 40,38,164
9 27,00,000 21,70,538 48,70,538
10 30,00,000 28,08,477 58,08,477
11 33,00,000 35,65,370 68,65,370
12 36,00,000 44,56,304 80,56,304

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