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?

A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to channelise their surplus funds 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 three scenarios to understand how time matters in compounding: a Rs 3,000 monthly SIP for 24 years, Rs 13,000 for 12 years and Rs 30,000 for 6 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 3,000 monthly investment for 24 years, Rs 13,000 for 12 years or 30,000 for 6 years?  

Scenario 1: Rs 3,000 monthly SIP for 24 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 3,000 for 24 years (288 months) will lead to a corpus of approximately Rs 50.18 lakh (a principal of Rs 8.64 lakh and an expected return of Rs 41.54 lakh). 

Scenario 2: Rs 13,000 monthly SIP for 12 years

Similarly, at the same expected return, a monthly SIP of Rs 13,000 for 12 years (144 months) will accumulate wealth to the tune of Rs 41.89 lakh, as per calculations (a principal of Rs 18.72 lakh and an expected return of Rs 23.17 lakh).

Scenario 3: Rs 30,000 monthly SIP for 6 years

Similarly, at the same expected return, a monthly SIP of Rs 30,000 for 6 years (72 months) will accumulate wealth to the tune of Rs 31.73 lakh, as per calculations (a Rs 21.60 lakh principal and an expected return of Rs 10.13 lakh).

Now, let's look at these estimates in detail (figures in rupees): 

Power of Compounding | Scenario 1

Power of Compounding | Scenario 2

Power of Compounding | Scenario 3

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