A Systematic Investment Plan (SIP) enables investors to channelise their surplus funds gradually to their chosen equity-related mutual fund schemes. This way, an investor not only gets to stay committed to their investment strategy but also harnesses the power of compounding. In this article, let's consider four scenarios to understand how time matters in compounding: a Rs 4,444 monthly SIP for 30 years, a Rs 6,666 monthly SIP for 25 years, a monthly SIP of Rs 8,888 for 22 years, and one of Rs 9,999 for 20 years.

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Can you guess the difference in the outcome in all four scenarios at an expected annualised return of 12 per cent?

SIP Return Estimates | Which one will you choose: Rs 4,444 monthly investment for 30 years, Rs 6,666 for 25 years, Rs 8,888 for 22 years or Rs 9,999 for 20 years?  

Scenario 1: Rs 4,444 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 4,444 for 30 years (360 months) will lead to a corpus of approximately Rs 1.57 crore (a principal of almost Rs 16 lakh and an estimated return of Rs 1.41 crore). 

Scenario 2: Rs 6,666 monthly SIP for 25 years

Similarly, at the same expected return, a monthly SIP of Rs 6,666 for 25 years (300 months) will accumulate wealth to the tune of Rs 1.26 crore (a principal of Rs 19,99,800 and an estimated return of Rs 1.06 crore), as per calculations.

Scenario 3: Rs 8,888 monthly SIP for 22 years

Similarly, at the same expected return, a monthly SIP of Rs 8,888 for 22 years (264 months) will accumulate wealth of around Rs 1.15 crore (a principal of Rs 23,46,432 and an estimated return of Rs 91.71 lakh), as per calculations.

Scenario 4: Rs 9,999 monthly SIP for 20 years

Can you guess the corpus you will end up with with a Rs 9,999 monthly SIP for 20 years?

It will be approximately, Rs 99.90 lakh (a principal of Rs 23,99,760 and an estimated return of Rs 75.91 lakh, calculations show. 

ALSO READ: Small SIP, Big Impact: Rs 8,888 monthly investment for 25 years or Rs 10,000 for 20 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 53,328 3,597 56,925
2 1,06,656 14,413 1,21,069
3 1,59,984 33,364 1,93,348
4 2,13,312 61,482 2,74,794
5 2,66,640 99,929 3,66,569
6 3,19,968 1,50,016 4,69,984
7 3,73,296 2,13,219 5,86,515
8 4,26,624 2,91,200 7,17,824
9 4,79,952 3,85,835 8,65,787
10 5,33,280 4,99,235 10,32,515
11 5,86,608 6,33,780 12,20,388
12 6,39,936 7,92,153 14,32,089
13 6,93,264 9,77,374 16,70,638
14 7,46,592 11,92,849 19,39,441
15 7,99,920 14,42,416 22,42,336
16 8,53,248 17,30,397 25,83,645
17 9,06,576 20,61,664 29,68,240
18 9,59,904 24,41,708 34,01,612
19 10,13,232 28,76,714 38,89,946
20 10,66,560 33,73,653 44,40,213
21 11,19,888 39,40,380 50,60,268
22 11,73,216 45,85,746 57,58,962
23 12,26,544 53,19,723 65,46,267
24 12,79,872 61,53,550 74,33,422
25 13,33,200 70,99,890 84,33,090
26 13,86,528 81,73,014 95,59,542
27 14,39,856 93,89,000 1,08,28,856
28 14,93,184 1,07,65,966 1,22,59,150
29 15,46,512 1,23,24,330 1,38,70,842
30 15,99,840 1,40,87,097 1,56,86,937

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 79,992 5,395 85,387
2 1,59,984 21,619 1,81,603
3 2,39,976 50,046 2,90,022
4 3,19,968 92,223 4,12,191
5 3,99,960 1,49,894 5,49,854
6 4,79,952 2,25,024 7,04,976
7 5,59,944 3,19,828 8,79,772
8 6,39,936 4,36,800 10,76,736
9 7,19,928 5,78,752 12,98,680
10 7,99,920 7,48,852 15,48,772
11 8,79,912 9,50,670 18,30,582
12 9,59,904 11,88,229 21,48,133
13 10,39,896 14,66,061 25,05,957
14 11,19,888 17,89,274 29,09,162
15 11,99,880 21,63,624 33,63,504
16 12,79,872 25,95,595 38,75,467
17 13,59,864 30,92,496 44,52,360
18 14,39,856 36,62,562 51,02,418
19 15,19,848 43,15,071 58,34,919
20 15,99,840 50,60,480 66,60,320
21 16,79,832 59,10,570 75,90,402
22 17,59,824 68,78,618 86,38,442
23 18,39,816 79,79,584 98,19,400
24 19,19,808 92,30,325 1,11,50,133
25 19,99,800 1,06,49,836 1,26,49,636

Power of Compounding | Scenario 3

Period (in Years) Investment Return Corpus
1 1,06,656 7,193 1,13,849
2 2,13,312 28,826 2,42,138
3 3,19,968 66,728 3,86,696
4 4,26,624 1,22,964 5,49,588
5 5,33,280 1,99,859 7,33,139
6 6,39,936 3,00,032 9,39,968
7 7,46,592 4,26,437 11,73,029
8 8,53,248 5,82,400 14,35,648
9 9,59,904 7,71,670 17,31,574
10 10,66,560 9,98,470 20,65,030
11 11,73,216 12,67,560 24,40,776
12 12,79,872 15,84,305 28,64,177
13 13,86,528 19,54,748 33,41,276
14 14,93,184 23,85,699 38,78,883
15 15,99,840 28,84,831 44,84,671
16 17,06,496 34,60,793 51,67,289
17 18,13,152 41,23,328 59,36,480
18 19,19,808 48,83,416 68,03,224
19 20,26,464 57,53,428 77,79,892
20 21,33,120 67,47,307 88,80,427
21 22,39,776 78,80,760 1,01,20,536
22 23,46,432 91,71,491 1,15,17,923

Power of Compounding | Scenario 4

Period (in Years) Investment Return Corpus Corpus
1 1,06,656 1,19,988 8,092 1,28,080
2 2,13,312 2,39,976 32,429 2,72,405
3 3,19,968 3,59,964 75,069 4,35,033
4 4,26,624 4,79,952 1,38,335 6,18,287
5 5,33,280 5,99,940 2,24,841 8,24,781
6 6,39,936 7,19,928 3,37,537 10,57,465
7 7,46,592 8,39,916 4,79,742 13,19,658
8 8,53,248 9,59,904 6,55,200 16,15,104
9 9,59,904 10,79,892 8,68,128 19,48,020
10 10,66,560 11,99,880 11,23,278 23,23,158
11 11,73,216 13,19,868 14,26,006 27,45,874
12 12,79,872 14,39,856 17,82,343 32,22,199
13 13,86,528 15,59,844 21,99,092 37,58,936
14 14,93,184 16,79,832 26,83,911 43,63,743
15 15,99,840 17,99,820 32,45,435 50,45,255
16 17,06,496 19,19,808 38,93,393 58,13,201
17 18,13,152 20,39,796 46,38,744 66,78,540
18 19,19,808 21,59,784 54,93,843 76,53,627
19 20,26,464 22,79,772 64,72,607 87,52,379
20 21,33,120 23,99,760 75,90,720 99,90,480

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