Power of Compounding: Starting with Rs 300-500/month, can your step-up SIP help you reach Rs 1 crore goal within desired time? See estimates
Power of Compounding, SIP Calculations: How much money can you save every month? How about a starting amount as small as Rs 300? Just like saving, investing is also not just an activity but rather a discipline—one that goes a long way over the long term. Saving small amounts of money towards your financial goal can reward you with significantly big returns over time. That is the true magic of compounding.
Power of Compounding, SIP Calculations: Just like saving, investing is also rather a discipline than a one-time task. Develop a habit of channelising your savings into a mutual fund of your choice through a Systematic Investment Plan (SIP) and sit back. The results can be surprising. Assuming a modest annualised return of 12 per cent, can you guess the size of your corpus at the end of, say, 25-30 years? Now, have you heard of step-up SIP? Also known as a top-up SIP, a step-up SIP enables investors to increase their MF investments gruagually over time, enabling them to devote a higher portion of their savings into their investments at regular intervals. Small increases in your SIP investments can make a big difference to your financial investment over time.
Save Small, Gain Big: At Rs 300/month, how far can you reach with your corpus in 25 years? See estimates
In this article, let’s take a look at a few examples to understand the impact of small changes to your SIP investments over a period of 25-30 years.
Rs 300/month SIP for 25-30 years
Let’s say you set up an SIP of Rs 300 a month (that’s an investment of Rs 3,600 a year) in a mutual fund that delivers a 12 per cent annualised return over time.
Rs 300/month SIP for 25-30 years
At 12 per cent, in 25 years, you would have invested a sum of Rs 90,000 and earned a return of about Rs 4.79 lakh, taking your corpus (investment plus return) to Rs 5.69 lakh, calculations show.
What happens if you continue your SIP for 5 more years?
If you continue your Rs 300 monthly SIP for 30 years instead of 25 years, you would have invested Rs 1.08 lakh (3,600 x 30) and earned a return of about Rs 9.51 lakh, helping you build a corpus of Rs 10.59 lakh, calculations show.
Step-up SIP of Rs 300 with 20% annual increase
Now, let’s say you increase your investment by 20 per cent every year using a step-up SIP.
Can you guess the difference it will make to your overall returns in the example above?
Step-up SIP of Rs 300 with 20% annual increase
Again, assuming a 12 per cent annualised return, a 20 per cent step-up SIP —which will essentially let you increase your investment by one-fifth every year—would have enabled you to invest Rs 16.99 lakh in 25 years and Rs 42.55 lakh in 30 years.
At 12 per cent, these investments will help you earn returns of Rs 22.71 lakh and Rs 63.23 lakh, leading to fiancnial corpuses of Rs 39.71 lakh and Rs 1.06 crore respectively, calculations show.
Every small increase counts, every year too…
As evident in the examples above, notice the difference between the end results of small and simple changes in your investments over the long term.
It doesn’t matter how small you start. The key to maximising your returns is starting early and staying invested over a long period of time, according to financial planners.
Power of Compounding | One more example…
Now, can you guess the result if you do the same with a monthly SIP of Rs 500, instead of Rs 300, for 35 years?
At an annualised return of 12 per cent, your investment of about Rs 1.77 crore through a 20 per cent step-up SIP of Rs 500/month in 35 years (20 per cent annual increase) would have earned you a return of Rs 2.83 crore, helping you achieve a corpus of almost Rs 4.60 crore, calculations show.
Have you heard of the power of compounding? What does it mean?
It is a common expression often used to highlight the importance of investments to generate significantly better results when the interest earned on a principal amount is added back to the principal amount at regular intervals.
In contrast to simple investments, compounding investments can grow exponentially over longer periods of time.