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.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

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. 

ALSO READ: Small SIP, Big Impact: Rs 3,000 monthly SIP for 24 years, Rs 13,000 for 12 years or Rs 30,000 for 6 years, which do you think works best?

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