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 5,100 monthly SIP for 25 years, Rs 15,000 for 15 years and Rs 21,000 for 10 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 5,100 monthly investment for 25 years, Rs 15,000 for 15 years or 21,000 for 10 years?  

Scenario 1: Rs 5,100 monthly SIP for 25 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 5,100 for 25 years (300 months) will lead to a corpus of approximately Rs 96.78 lakh (a principal of Rs 15.3 lakh and an expected return of Rs 81.48 lakh). 

Scenario 2: Rs 15,000 monthly SIP for 15 years

Similarly, at the same expected return, a monthly SIP of Rs 15,000 for 15 years (180 months) will accumulate wealth to the tune of Rs 75.69 lakh, as per calculations (a principal of Rs 27 lakh and an expected return of Rs 48.69 lakh).

Scenario 3: Rs 21,000 monthly SIP for 10 years

Similarly, at the same expected return, a monthly SIP of Rs 21,000 for 10 years (120 months) will accumulate wealth to the tune of Rs 48.79 lakh, as per calculations (a Rs 25.2 lakh principal and an expected return of Rs 23.59 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 61,200 4,128 65,328
2 1,22,400 16,540 1,38,940
3 1,83,600 38,289 2,21,889
4 2,44,800 70,558 3,15,358
5 3,06,000 1,14,680 4,20,680
6 3,67,200 1,72,161 5,39,361
7 4,28,400 2,44,693 6,73,093
8 4,89,600 3,34,185 8,23,785
9 5,50,800 4,42,790 9,93,590
10 6,12,000 5,72,929 11,84,929
11 6,73,200 7,27,336 14,00,536
12 7,34,400 9,09,086 16,43,486
13 7,95,600 11,21,649 19,17,249
14 8,56,800 13,68,932 22,25,732
15 9,18,000 16,55,338 25,73,338
16 9,79,200 19,85,829 29,65,029
17 10,40,400 23,65,996 34,06,396
18 11,01,600 28,02,140 39,03,740
19 11,62,800 33,01,360 44,64,160
20 12,24,000 38,71,654 50,95,654
21 12,85,200 45,22,038 58,07,238
22 13,46,400 52,62,669 66,09,069
23 14,07,600 61,04,992 75,12,592
24 14,68,800 70,61,905 85,30,705
25 15,30,000 81,47,939 96,77,939

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 1,80,000 12,140 1,92,140
2 3,60,000 48,648 4,08,648
3 5,40,000 1,12,615 6,52,615
4 7,20,000 2,07,523 9,27,523
5 9,00,000 3,37,295 12,37,295
6 10,80,000 5,06,355 15,86,355
7 12,60,000 7,19,685 19,79,685
8 14,40,000 9,82,898 24,22,898
9 16,20,000 13,02,323 29,22,323
10 18,00,000 16,85,086 34,85,086
11 19,80,000 21,39,222 41,19,222
12 21,60,000 26,73,783 48,33,783
13 23,40,000 32,98,967 56,38,967
14 25,20,000 40,26,269 65,46,269
15 27,00,000 48,68,640 75,68,640

Power of Compounding | Scenario 3

Period (in Years) Investment Return Corpus
1 2,52,000 16,996 2,68,996
2 5,04,000 68,107 5,72,107
3 7,56,000 1,57,661 9,13,661
4 10,08,000 2,90,532 12,98,532
5 12,60,000 4,72,214 17,32,214
6 15,12,000 7,08,898 22,20,898
7 17,64,000 10,07,559 27,71,559
8 20,16,000 13,76,058 33,92,058
9 22,68,000 18,23,252 40,91,252
10 25,20,000 23,59,121 48,79,121

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