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 Rs 999 monthly SIP for 30 years or a Rs 9,999 SIP for 10 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 999 monthly investment for 30 years or Rs 9,999 for 10 years?  

Scenario 1: Rs 999 monthly SIP for 30 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 999 for 30 years (360 months) will lead to a corpus of approximately Rs 35.26 lakh (a principal of Rs 3,59,640 and an estimated return of about Rs 31.67 lakh). 

Scenario 2: Rs 9,999 monthly SIP for 10 years

Similarly, at the same expected return, a monthly SIP of Rs 9,999 for 10 years (120 months) will accumulate wealth to the tune of Rs 23.23 lakh, as per calculations (a principal of Rs 11,99,880
and an expected return of Rs 11.23 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 11,988 809 12,797
2 23,976 3,240 27,216
3 35,964 7,500 43,464
4 47,952 13,821 61,773
5 59,940 22,464 82,404
6 71,928 33,723 1,05,651
7 83,916 47,931 1,31,847
8 95,904 65,461 1,61,365
9 1,07,892 86,735 1,94,627
10 1,19,880 1,12,227 2,32,107
11 1,31,868 1,42,472 2,74,340
12 1,43,856 1,78,074 3,21,930
13 1,55,844 2,19,711 3,75,555
14 1,67,832 2,68,150 4,35,982
15 1,79,820 3,24,251 5,04,071
16 1,91,808 3,88,989 5,80,797
17 2,03,796 4,63,457 6,67,253
18 2,15,784 5,48,890 7,64,674
19 2,27,772 6,46,678 8,74,450
20 2,39,760 7,58,389 9,98,149
21 2,51,748 8,85,788 11,37,536
22 2,63,736 10,30,864 12,94,600
23 2,75,724 11,95,860 14,71,584
24 2,87,712 13,83,302 16,71,014
25 2,99,700 15,96,037 18,95,737
26 3,11,688 18,37,273 21,48,961
27 3,23,676 21,10,623 24,34,299
28 3,35,664 24,20,162 27,55,826
29 3,47,652 27,70,478 31,18,130
30 3,59,640 31,66,744 35,26,384

Power of Compounding | Scenario 2

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

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