Small SIP, Big Impact: Rs 5,555 monthly SIP for 30 years, Rs 7,777 for 25 years or Rs 9,999 for 20 years, which do you think works best?
Power of Compounding: Many investors prefer systematic investment plans (SIPs) to park their surplus funds in mutual fund schemes. This is simply because an SIP enables the investor to direct their cash towards a desired equity-related scheme gradually, instead of arranging a large amount of money in lump sum. In this article, let's look at different scenarios to learn about the role time plays when it comes to compounding.
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A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to utilise their surplus funds gradually in their chosen equity-related mutual fund scheme. This way, an investor not only gets to stay committed to their investment strategy but is also able to harness the power 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 5,555 monthly SIP for 30 years, a Rs 7,777 monthly SIP for 25 years and a Rs 9,999 monthly SIP for 20 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 5,555 monthly investment for 30 years, Rs 7,777 for 25 years or Rs 9,999 for 20 years?
Scenario 1: Rs 5,555 monthly SIP for 30 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 5,555 for 30 years (360 months) will lead to a corpus of approximately Rs 1.96 crore.
Scenario 2: Rs 7,777 monthly SIP for 25 years
Similarly, at the same expected return, a monthly SIP of Rs 7,777 for 25 years (300 months) will accumulate wealth to the tune of Rs 1.48 crore, as per calculations.
Scenario 3: 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 (240 months)?
It will be approximately, Rs 99.90,480 lakh, calculations show.
Now, let's look at these estimates in detail (figures in rupees):
Power of Compounding | Scenario 1
| Period (in Years) | Investment | Return | Corpus |
| 1 | 66,660 | 4,496 | 71,156 |
| 2 | 1,33,320 | 18,016 | 1,51,336 |
| 3 | 1,99,980 | 41,705 | 2,41,685 |
| 4 | 2,66,640 | 76,853 | 3,43,493 |
| 5 | 3,33,300 | 1,24,912 | 4,58,212 |
| 6 | 3,99,960 | 1,87,520 | 5,87,480 |
| 7 | 4,66,620 | 2,66,523 | 7,33,143 |
| 8 | 5,33,280 | 3,64,000 | 8,97,280 |
| 9 | 5,99,940 | 4,82,293 | 10,82,233 |
| 10 | 6,66,600 | 6,24,044 | 12,90,644 |
| 11 | 7,33,260 | 7,92,225 | 15,25,485 |
| 12 | 7,99,920 | 9,90,191 | 17,90,111 |
| 13 | 8,66,580 | 12,21,718 | 20,88,298 |
| 14 | 9,33,240 | 14,91,062 | 24,24,302 |
| 15 | 9,99,900 | 18,03,020 | 28,02,920 |
| 16 | 10,66,560 | 21,62,996 | 32,29,556 |
| 17 | 11,33,220 | 25,77,080 | 37,10,300 |
| 18 | 11,99,880 | 30,52,135 | 42,52,015 |
| 19 | 12,66,540 | 35,95,893 | 48,62,433 |
| 20 | 13,33,200 | 42,17,067 | 55,50,267 |
| 21 | 13,99,860 | 49,25,475 | 63,25,335 |
| 22 | 14,66,520 | 57,32,182 | 71,98,702 |
| 23 | 15,33,180 | 66,49,653 | 81,82,833 |
| 24 | 15,99,840 | 76,91,937 | 92,91,777 |
| 25 | 16,66,500 | 88,74,863 | 1,05,41,363 |
| 26 | 17,33,160 | 1,02,16,267 | 1,19,49,427 |
| 27 | 17,99,820 | 1,17,36,250 | 1,35,36,070 |
| 28 | 18,66,480 | 1,34,57,458 | 1,53,23,938 |
| 29 | 19,33,140 | 1,54,05,413 | 1,73,38,553 |
| 30 | 19,99,800 | 1,76,08,871 | 1,96,08,671 |
Power of Compounding | Scenario 2
| Period (in Years) | Investment | Return | Corpus |
| 1 | 93,324 | 6,294 | 99,618 |
| 2 | 1,86,648 | 25,222 | 2,11,870 |
| 3 | 2,79,972 | 58,387 | 3,38,359 |
| 4 | 3,73,296 | 1,07,594 | 4,80,890 |
| 5 | 4,66,620 | 1,74,876 | 6,41,496 |
| 6 | 5,59,944 | 2,62,528 | 8,22,472 |
| 7 | 6,53,268 | 3,73,133 | 10,26,401 |
| 8 | 7,46,592 | 5,09,600 | 12,56,192 |
| 9 | 8,39,916 | 6,75,211 | 15,15,127 |
| 10 | 9,33,240 | 8,73,661 | 18,06,901 |
| 11 | 10,26,564 | 11,09,115 | 21,35,679 |
| 12 | 11,19,888 | 13,86,267 | 25,06,155 |
| 13 | 12,13,212 | 17,10,405 | 29,23,617 |
| 14 | 13,06,536 | 20,87,486 | 33,94,022 |
| 15 | 13,99,860 | 25,24,228 | 39,24,088 |
| 16 | 14,93,184 | 30,28,194 | 45,21,378 |
| 17 | 15,86,508 | 36,07,912 | 51,94,420 |
| 18 | 16,79,832 | 42,72,989 | 59,52,821 |
| 19 | 17,73,156 | 50,34,250 | 68,07,406 |
| 20 | 18,66,480 | 59,03,893 | 77,70,373 |
| 21 | 19,59,804 | 68,95,665 | 88,55,469 |
| 22 | 20,53,128 | 80,25,055 | 1,00,78,183 |
| 23 | 21,46,452 | 93,09,515 | 1,14,55,967 |
| 24 | 22,39,776 | 1,07,68,712 | 1,30,08,488 |
| 25 | 23,33,100 | 1,24,24,808 | 1,47,57,908 |
Power of Compounding | Scenario 3
| Period (in Years) | Investment | Return | Corpus |
| 1 | 1,19,988 | 8,092 | 1,28,080 |
| 2 | 2,39,976 | 32,429 | 2,72,405 |
| 3 | 3,59,964 | 75,069 | 4,35,033 |
| 4 | 4,79,952 | 1,38,335 | 6,18,287 |
| 5 | 5,99,940 | 2,24,841 | 8,24,781 |
| 6 | 7,19,928 | 3,37,537 | 10,57,465 |
| 7 | 8,39,916 | 4,79,742 | 13,19,658 |
| 8 | 9,59,904 | 6,55,200 | 16,15,104 |
| 9 | 10,79,892 | 8,68,128 | 19,48,020 |
| 10 | 11,99,880 | 11,23,278 | 23,23,158 |
| 11 | 13,19,868 | 14,26,006 | 27,45,874 |
| 12 | 14,39,856 | 17,82,343 | 32,22,199 |
| 13 | 15,59,844 | 21,99,092 | 37,58,936 |
| 14 | 16,79,832 | 26,83,911 | 43,63,743 |
| 15 | 17,99,820 | 32,45,435 | 50,45,255 |
| 16 | 19,19,808 | 38,93,393 | 58,13,201 |
| 17 | 20,39,796 | 46,38,744 | 66,78,540 |
| 18 | 21,59,784 | 54,93,843 | 76,53,627 |
| 19 | 22,79,772 | 64,72,607 | 87,52,379 |
| 20 | 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
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