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.

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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 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).

ALSO READ: Small SIP, Big Impact: Rs 2,500 monthly SIP for 30 years or Rs 25,000 for 12 years, which do you think works better?

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