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 gets to stay committed to their investment strategy and 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 two scenarios to understand how time matters in compounding: a Rs 7,777 monthly SIP for 20 years and a monthly SIP of Rs 11,111 for 17 years.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

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

SIP Return Estimates | Which one will you choose: Rs 7,777 monthly investment for 20 years or Rs 11,111 for 17 years?  

Scenario 1: Rs 7,777 monthly SIP for 20 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 7,777 for 20 years (240 months) will lead to a corpus of approximately Rs 77.70 lakh (a principal of Rs 18,66,480 and an estimated return of approximately Rs 59.04 lakh). 

Scenario 2: Rs 11,111 monthly SIP for 17 years

Similarly, at the same expected return, a monthly SIP of Rs 11,111 for 17 years (204 months) will accumulate wealth to the tune of Rs 74.21 lakh (a principal of Rs 22,66,644 and an estimated return of Rs 51.55 lakh), as per calculations.

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 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

Power of Compounding | Scenario 2

 

Period (in Years) Investment Return Corpus
1 1,33,332 8,992 1,42,324
2 2,66,664 36,035 3,02,699
3 3,99,996 83,417 4,83,413
4 5,33,328 1,53,719 6,87,047
5 6,66,660 2,49,846 9,16,506
6 7,99,992 3,75,074 11,75,066
7 9,33,324 5,33,095 14,66,419
8 10,66,656 7,28,066 17,94,722
9 11,99,988 9,64,674 21,64,662
10 13,33,320 12,48,199 25,81,519
11 14,66,652 15,84,593 30,51,245
12 15,99,984 19,80,560 35,80,544
13 17,33,316 24,43,655 41,76,971
14 18,66,648 29,82,392 48,49,040
15 19,99,980 36,06,364 56,06,344
16 21,33,312 43,26,381 64,59,693
17 22,66,644 51,54,624 74,21,268

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