A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to park their surplus cash 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 two scenarios to understand how time matters in compounding: a monthly SIP of Rs 8,888 for 25 years and one of Rs 10,000 for 20 years.

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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 8,888 monthly investment for 25 years or Rs 10,000 for 20 years?  

Scenario 1: Rs 8,888 monthly SIP for 25 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 8,888 for 25 years (300 months) will lead to a corpus of approximately Rs 1.69 crore (a principal of Rs 26,66,400 and an estimated return of almost Rs 1.42 crore). 

Scenario 2: Rs 10,000 monthly SIP for 20 years

Similarly, at the same expected return, a monthly SIP of Rs 10,000 for 20 years (240 months) will accumulate wealth to the tune of Rs 99.91 lakh, as per calculations (a principal of Rs 24 lakh and an expected return of Rs 75.91 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 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
23 24,53,088 1,06,39,445 1,30,92,533
24 25,59,744 1,23,07,100 1,48,66,844
25 26,66,400 1,41,99,781 1,68,66,181

Power of Compounding | Scenario 2

Period (in Years) Investment Return Corpus
1 1,20,000 8,093 1,28,093
2 2,40,000 32,432 2,72,432
3 3,60,000 75,076 4,35,076
4 4,80,000 1,38,348 6,18,348
5 6,00,000 2,24,864 8,24,864
6 7,20,000 3,37,570 10,57,570
7 8,40,000 4,79,790 13,19,790
8 9,60,000 6,55,266 16,15,266
9 10,80,000 8,68,215 19,48,215
10 12,00,000 11,23,391 23,23,391
11 13,20,000 14,26,148 27,46,148
12 14,40,000 17,82,522 32,22,522
13 15,60,000 21,99,311 37,59,311
14 16,80,000 26,84,180 43,64,180
15 18,00,000 32,45,760 50,45,760
16 19,20,000 38,93,782 58,13,782
17 20,40,000 46,39,208 66,79,208
18 21,60,000 54,94,392 76,54,392
19 22,80,000 64,73,254 87,53,254
20 24,00,000 75,91,479 99,91,479

ALSO READ: Small SIP, Big Impact: Rs 1,111 monthly SIP for 40 years, Rs 11,111 for 20 years or Rs 22,222 for 10 years, which do you think works best?

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