Power of Compounding: How your retirement corpus can reach from Rs 2.27 cr to Rs 3.94 cr if you get 3% extra returns on Rs 12,000 monthly SIP investment
Power of Compounding: Getting high returns on investment matters a lot. Even if one gets 1 per cent extra return on their investment, their corpus can increase by many crores in the long run because of compounding they get on their investment.
Compounding Returns: While planning your investments, it is good to tune them to your retirement goals. Once the goals are reached, one can withdraw their corpus. But what if they get extra returns on their investments compared to what they had expected? It will help them reach their retirement corpus goal much earlier than the target duration. At this point, if they don't want that corpus and continue their investments for more years, their corpus can witness a considerable jump. Even if they get one per cent extra returns on their investments compared to the expected return, their corpus can increase by many crores in the long run. In this write-up, we will tell how, on a Rs 12,000 monthly SIP investment, someone's retirement corpus can reach from estimated Rs 2.27 crore to estimated Rs 3.94 crore even if they get 15 per cent return instead of 12 per cent on their investment.
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for retirement planning.)
Photos: Unsplash/Pixabay
Why compounding is important?
Compounding on returns may not play an important role in the short run, but it can have magical results in the long term.
Example of compounding
If one invests Rs 6,000 monthly in a mutual fund SIP for 15 years and gets 12 per cent return on it, their investment in those years will be Rs 10,80,000.
Expected capital gains on the corpus will be Rs 19,47,456, and the expected corpus will be Rs 30,27,456.
Example of compounding
But if some continue this investment for another 15 years, their investment will be double to Rs 21,60,000.
Expected capital gains will be Rs 1,90,19,483, and the expected corpus will be Rs 2,11,79,483.
Another example
Similarly if one invests Rs 4,000 monthly in a mutual fund SIP for 10 years and gets 12 per cent annualised return on that, their investment in 10 years will be Rs 4,80,000.
Estimated capital gains on it will be Rs 4,49,356, and the expected corpus will be Rs 9,29,356.
Another example
But continuing it for another 10 years will give estimated capital gains of Rs 30,36,592, and the expected corpus will be Rs 39,96,592.
In the above 2 examples, it is evident how compounding plays a key role in accelerating gains with time.
Compounding effect through extra returns
Here, we take the example of A and B who invest Rs 5,000 monthly in a mutual fund SIP for 15 years. A gets 12 per cent annualised return and B gets 13 per cent.
Both will invest Rs 9,00,000 each in 15 years.
Compounding effect through extra returns
While A will get an estimated corpus of Rs 25,22,880, B will have an estimated corpus of Rs 27,78,406. There is not much difference. But fast-forward it to 15 more years.
In 30 years, A's estimated corpus will be Rs 1,76,49,569, while B's estimated corpus will be Rs 2,21,03,234.
SIP investment calculation conditions
In our SIP calculation, we will show Rs 12,000 monthly SIP investment for 25 years. The rates of return will be 12 per cent and 15 per cent, respectively.
Retirement corpus at Rs 12,000 monthly SIP investment for 25 years (12% return)
Total investment in 25 years will be Rs 36,00,000.
At 12 per cent annualised growth, estimated gains will be Rs 1,91,71,621, while the expected retirement corpus will be Rs 2,27,71,621.
Retirement corpus at Rs 12,000 monthly SIP investment for 25 years (15% return)
At 15 per cent annualised growth, estimated capital gains will be Rs 3,58,08,885, while the expected retirement corpus will be Rs 3,94,08,885.
What if one continues it for 30 years?
In 30 years, total investment will be Rs 43,20,000.
At 12 per cent annualised return, estimated capital gains will be Rs 3,80,38,965, while estimated retirement corpus will be Rs 4,23,58,965.
What if one continues it for 30 years?
At 15 per cent annualised growth, estimated capital gains will be Rs 7,97,97,847, while the estimated retirement corpus will be Rs 8,41,17,847.
It shows that the gap widens in the long run because of compounding returns.