Retirement Planning: How Rs 2 crore corpus can reach Rs 4 crore in just 3 years with 2 per cent additional returns
Power of Compounding: Compound returns are returns on returns. The investor gets returns not only on the principal amount but also on the returns earned over the years. E.g., if one invests Rs 1 lakh in a scheme and gets 12 per cent annualised returns, after the first year, the maturity amount will be Rs 1.12 lakh, but for the next year, they will get 12 per cent return on Rs 1.12 lakh
Power of Compounding: In investment, returns play a key role. The impact of returns may not be evident in the short term, but in the long term, just 1 per cent extra return can be a game-changer. E.g., on a Rs 10,000 monthly investment, maturity amounts on 12 per cent and 13 per cent annualised returns will be Rs 8,11,036, and 8,31,369, respectively, but in 30 years, they will be Rs 3,08,09,732, and Rs 3,76,15,190. It means just a 100 basis point extra return can generate an estimated additional corpus of Rs 68,05,458. This happens because of the power of compounding. Know more about how compounding works in fixed interest rate schemes and mutual funds and how 2 per cent additional annualised returns can turn a Rs 2 crore corpus into Rs 4 crore with just 3 years of extra investing.
(Disclaimer: Our calculations are projections and are not investment advice. Do your own due diligence or consult an advisor for investment planning.)
What are compound returns?
Compound returns are returns on returns. The investor gets returns not only on the principal amount but also on the returns earned over the years. E.g., if one invests Rs 1 lakh in a scheme and gets 12 per cent annualised returns, after the first year, the maturity amount will be Rs 1.12 lakh, but for the next year, they will get 12 per cent return on Rs 1.12 lakh, and not just on the principal amount of Rs 1 lakh.
How compounding works in fixed income schemes
In schemes offering fixed compound interest rates, investors get interest on interest. If they have invested Rs 2 lakh in a scheme where they are getting 10 per cent return. After 1 year, their investment will grow to Rs 2.20; for the second year, they will get 10 per cent interest on Rs 2.20 lakh, so the maturity amount after 2 years will be Rs 2.42 lakh.
How compounding works in mutual funds (SIP and lump sum)
Since returns are not fixed in mutual funds, compound growth is calculated on the basis of annualised growth of investment. E.g., if one gets 15 per cent annualised return in the first year, 6 per cent deficit in the 2nd year, and 11 per cent growth in the third year, their annualised growth will be 6.66 per cent, the average of all 3.
How compounding can work for Rs 500/m SIP investment for 40 years
To show the impact of compounding, we take here the example of Rs 500 monthly SIP investment for 40 years in a mutual fund. If an investor gets 12 per cent annualised return on it, in 40 years, their investment will be Rs 2,40,000, but the estimated corpus will be Rs 48,96,536.
How compounding can work for Rs 500/m SIP investment for 40 years
Now, if the same investor gets 14 per cent annualised returns instead of 12 per cent, the estimated corpus will grow to Rs 86,50,552 in 40 years.
How compounding can work for Rs 10,000/m SIP investment for 40 years
If one gets 12 per cent annualised return on Rs 10,000 monthly SIP for 40 years, the investment will be Rs 48,00,000, and the estimated corpus will be Rs 9,79,30,710.
How compounding can work for Rs 10,000/m SIP investment for 40 years
But if the same investor gets 14 per cent annualised returns on the SIP investment, the estimated corpus will be Rs 17,30,11,040.
How 2% additional returns can double corpus
For our calculation, we will take the example of a Rs 20,000 monthly SIP investment for 20 years. And see how with just 2 per cent additional annualised return and 3 years of extra investing, the corpus can be doubled.
Corpus on Rs 20,000/m SIP investment at 12% returns in 20 years
If one invests Rs 20,000 monthly in a mutual fund SIP for 20 years and gets 12 per cent annualised return on that, the investment will be Rs 48,00,000, the estimated returns will be Rs 1,51,82,958, and the estimated corpus will be Rs 1,99,82,958.
Corpus on Rs 20,000/m SIP investment at 14% return in 20 years
At 14 per cent annualised SIP return in 20 years, estimated returns will be Rs 2,15,26,926, and the estimated corpus will be Rs 2,63,26,926.
Corpus on Rs 20,000/m SIP at 14% SIP return in 23 years
If one continues the same investment for 3 more years and keeps getting 14 per cent annualised returns on that, their investment will be Rs 55,20,000, estimated returns will be Rs 3,53,50,097, and the estimated value will be Rs 4,08,70,097.
Rs 2.08 cr additional corpus in 3 years
Thus we see that the additional investment in 3 years was Rs 7,20,000, but the additional estimated corpus created by doing it is Rs 2,08,87,139. So, with 2 per cent additional annualised returns and Rs 7.20 lakh additional investment, a Rs 2 crore corpus became a Rs 4 crore corpus.