Small SIP, Big Impact: Rs 4,000 monthly SIP for 20 years, Rs 6,000 for 16 years or Rs 8,000 for 12 years, which do you think works best?
Power of Compounding: An SIP or systematic investment plan is a popular way of investing in mutual fund schemes of choice, as it enables investors to direct their cash towards a desired equity-related scheme gradually. In this article, let's look at three scenarios to learn about the role time plays when it comes to compounding.
A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to park their surplus funds in their mutual fund scheme of choice. This enables investors to not only stay committed to their long-term investment strategy but also to make the most 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 4,000 monthly SIP for 20 years, a Rs 6,000 monthly SIP for 16 years and Rs 8,000 for 12 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 4,000 monthly investment for 20 years, Rs 6,000 for 16 years or 8,000 for 12 years?
Scenario 1: Rs 4,000 monthly SIP for 20 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 4,000 for 20 years (240 months) will lead to a corpus of approximately Rs 39.97 lakh (a principal of Rs 9.6 lakh and an expected return of Rs 30.37 lakh).
Scenario 2: Rs 6,000 monthly SIP for 16 years
Similarly, at the same expected return, a monthly SIP of Rs 6,000 for 16 years (192 months) will accumulate wealth to the tune of Rs 34.88 lakh, as per calculations (a principal of Rs 11.52 lakh and an expected return of Rs 23.36 lakh).
Scenario 3: Rs 8,000 monthly SIP for 12 years
Similarly, at the same expected return, a monthly SIP of Rs 8,000 for 12 years (144 months) will lead to a Rs 25.78 lakh corpus, as per calculations (a Rs 11.52 lakh principal and an expected return of Rs 14.26 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 | 48,000 | 3,237 | 51,237 |
2 | 96,000 | 12,973 | 1,08,973 |
3 | 1,44,000 | 30,031 | 1,74,031 |
4 | 1,92,000 | 55,339 | 2,47,339 |
5 | 2,40,000 | 89,945 | 3,29,945 |
6 | 2,88,000 | 1,35,028 | 4,23,028 |
7 | 3,36,000 | 1,91,916 | 5,27,916 |
8 | 3,84,000 | 2,62,106 | 6,46,106 |
9 | 4,32,000 | 3,47,286 | 7,79,286 |
10 | 4,80,000 | 4,49,356 | 9,29,356 |
11 | 5,28,000 | 5,70,459 | 10,98,459 |
12 | 5,76,000 | 7,13,009 | 12,89,009 |
13 | 6,24,000 | 8,79,725 | 15,03,725 |
14 | 6,72,000 | 10,73,672 | 17,45,672 |
15 | 7,20,000 | 12,98,304 | 20,18,304 |
16 | 7,68,000 | 15,57,513 | 23,25,513 |
17 | 8,16,000 | 18,55,683 | 26,71,683 |
18 | 8,64,000 | 21,97,757 | 30,61,757 |
19 | 9,12,000 | 25,89,302 | 35,01,302 |
20 | 9,60,000 | 30,36,592 | 39,96,592 |
Power of Compounding | Scenario 2
Period (in Years) | Investment | Return | Corpus |
1 | 72,000 | 4,856 | 76,856 |
2 | 1,44,000 | 19,459 | 1,63,459 |
3 | 2,16,000 | 45,046 | 2,61,046 |
4 | 2,88,000 | 83,009 | 3,71,009 |
5 | 3,60,000 | 1,34,918 | 4,94,918 |
6 | 4,32,000 | 2,02,542 | 6,34,542 |
7 | 5,04,000 | 2,87,874 | 7,91,874 |
8 | 5,76,000 | 3,93,159 | 9,69,159 |
9 | 6,48,000 | 5,20,929 | 11,68,929 |
10 | 7,20,000 | 6,74,034 | 13,94,034 |
11 | 7,92,000 | 8,55,689 | 16,47,689 |
12 | 8,64,000 | 10,69,513 | 19,33,513 |
13 | 9,36,000 | 13,19,587 | 22,55,587 |
14 | 10,08,000 | 16,10,508 | 26,18,508 |
15 | 10,80,000 | 19,47,456 | 30,27,456 |
16 | 11,52,000 | 23,36,269 | 34,88,269 |
Power of Compounding | Scenario 3
Period (in Years) | Investment | Return | Corpus |
1 | 96,000 | 6,475 | 1,02,475 |
2 | 1,92,000 | 25,946 | 2,17,946 |
3 | 2,88,000 | 60,061 | 3,48,061 |
4 | 3,84,000 | 1,10,679 | 4,94,679 |
5 | 4,80,000 | 1,79,891 | 6,59,891 |
6 | 5,76,000 | 2,70,056 | 8,46,056 |
7 | 6,72,000 | 3,83,832 | 10,55,832 |
8 | 7,68,000 | 5,24,213 | 12,92,213 |
9 | 8,64,000 | 6,94,572 | 15,58,572 |
10 | 9,60,000 | 8,98,713 | 18,58,713 |
11 | 10,56,000 | 11,40,919 | 21,96,919 |
12 | 11,52,000 | 14,26,017 | 25,78,017 |
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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