A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to park their surplus cash 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 two scenarios to understand how time matters in compounding: a Rs 3,333 monthly SIP for 30 years or a Rs 33,333 SIP for 10 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 3,333 monthly investment for 30 years or Rs 33,333 for 10 years?  

Scenario 1: Rs 3,333 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 3,333 for 30 years (360 months) will lead to a corpus of approximately Rs 1.18 crore (a principal of Rs 11,99,880
and an estimated return of almost Rs 1.06 crore). 

Scenario 2: Rs 33,333 monthly SIP for 10 years

Similarly, at the same expected return, a monthly SIP of Rs 33,333 for 10 years (120 months) will accumulate wealth to the tune of Rs 77.45 lakh, as per calculations (a principal of Rs 39,99,960 and an expected return of Rs 37.45 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 39,996 2,697 42,693
2 79,992 10,810 90,802
3 1,19,988 25,023 1,45,011
4 1,59,984 46,112 2,06,096
5 1,99,980 74,947 2,74,927
6 2,39,976 1,12,512 3,52,488
7 2,79,972 1,59,914 4,39,886
8 3,19,968 2,18,400 5,38,368
9 3,59,964 2,89,376 6,49,340
10 3,99,960 3,74,426 7,74,386
11 4,39,956 4,75,335 9,15,291
12 4,79,952 5,94,114 10,74,066
13 5,19,948 7,33,031 12,52,979
14 5,59,944 8,94,637 14,54,581
15 5,99,940 10,81,812 16,81,752
16 6,39,936 12,97,798 19,37,734
17 6,79,932 15,46,248 22,26,180
18 7,19,928 18,31,281 25,51,209
19 7,59,924 21,57,536 29,17,460
20 7,99,920 25,30,240 33,30,160
21 8,39,916 29,55,285 37,95,201
22 8,79,912 34,39,309 43,19,221
23 9,19,908 39,89,792 49,09,700
24 9,59,904 46,15,162 55,75,066
25 9,99,900 53,24,918 63,24,818
26 10,39,896 61,29,760 71,69,656
27 10,79,892 70,41,750 81,21,642
28 11,19,888 80,74,475 91,94,363
29 11,59,884 92,43,248 1,04,03,132
30 11,99,880 1,05,65,323 1,17,65,203

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 3,99,996 26,977 4,26,973
2 7,99,992 1,08,106 9,08,098
3 11,99,988 2,50,252 14,50,240
4 15,99,984 4,61,157 20,61,141
5 19,99,980 7,49,538 27,49,518
6 23,99,976 11,25,223 35,25,199
7 27,99,972 15,99,284 43,99,256
8 31,99,968 21,84,197 53,84,165
9 35,99,964 28,94,021 64,93,985
10 39,99,960 37,44,598 77,44,558

ALSO READ: Small SIP, Big Impact: Rs 1,111 monthly SIP for 40 years, Rs 11,111 for 20 years or Rs 22,222 for 10 years, 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