Magic of Compounding: Can Rs 5,000 monthly SIP generate higher corpus than Rs 15,000 monthly SIP? See calculations
Power of Compounding: A smaller monthly investment can help one generate a higher corpus compared to the corpus generated from a higher amount if their investment period is longer.
Compounding SIP Returns: Have a low monthly amount to invest but want a retirement corpus that can fulfil your financial needs in the future? Don't worry? You don't need to be discouraged; all you need to do is be committed, pick the right kind of investments, and stick to your habit of investing for a long time. The magic of compounding can do wonders with your investment. To make the most of the compounding benefits, it's not about a large monthly or lump sum investment; it's about the longevity of the investment that keeps one ahead in the race to retirement corpus.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for finacial planning.)
How compounding works
The longer one stays in their investment, the higher their corpus is likely to be, because they will get more years for compounding of their returns compared to someone who has started late.
Examples of compounding
A and B start two separate investments. A invests Rs 5,000 monthly in a SIP, B invests Rs 2,000. A stops their investment after 20 years and withdraws. B continues for 15 more years. Both get 12 per cent annualised return on their respective investments.
Examples of compounding
After 15 years, A's estimated corpus will be Rs 49,95,740 with Rs 12,00,000 investment, but after 30 years, B's estimated corpus will be Rs 70,59,828 with just Rs 7,20,000 investment. This happens because of more years of compounding.
More example
A and B set the retirement corpus target of Rs 2 crore. A wants to achieve it in 15 years and B in 30 years. Both are expecting 12 per cent annualised return.
More example
A needs to invest approximately Rs 40,000 a month, or Rs 72,00,000 to achieve the goal, while B can achieve the same with just approximately Rs 6,000 monthly SIP and Rs 21,60,000 overall investment. The reason is B got more years for compounding.
How SIP investment can help
When one invests in SIP, they purchase NAVs at different rates every investment cycle. This difference in the price provides compounding in the long run. So, when one continues this investment for a long time and buys NAVs at different rates, their retirement corpus rises faster.
How SIP investment can help
E.g., if one starts a Rs 10,000 monthly SIP and invests for 20 years at 12 per cent annualised return, their estimated corpus will be Rs 99,91,479 with an investment of Rs 24,00,000, but if they continue it for 5 more years with an extra investment of Rs 6,00,000, their corpus will grow to estimated Rs 1,89,76,351.
How one can create higher corpus with Rs 5,000 monthly SIP compared to Rs 15,000 SIP
For that, one needs to start investing early.
If one starts a Rs 5,000 monthly SIP and continues their investment for 30 years, their investments will be Rs 18,00,000, estimated capital gains will be Rs 1,58,49,569, and the estimated corpus will be Rs 1,76,49,569.
How one can create higher corpus with Rs 5,000 monthly SIP compared to Rs 15,000 SIP
If someone starts a Rs 15,000 monthly SIP investment and does it for 20 years, their investment will be Rs 36,00,000, estimated capital gains will be Rs 1,13,87,219, and the estimated corpus will be Rs 1,49,87,219.
What's the bottom line?
The key is to start investing early in life. The more one delays, the more their retirement corpus may suffer. Even if one starts with a low-amount investment, they can increase the amount once their income increases, but delaying it till the time your salary gets better makes no sense.