Power of Compounding in SIP: What Rs 7,000 monthly SIP can generate in 10, 20, 30 and 40 years; know how compounding works
Power of Compounding: The power of compounding can be realised more significantly in the long run. A Rs 1,000 monthly SIP with 12 per cent annualised returns can generate a Rs 98 lakh corpus in 40 years, but a Rs 10,000 monthly SIP will generate just Rs 92 lakh in 20 years with the same rate of return. However, the investment in the second case will be nearly 6X compared to the investment in the first case.
Compounding returns, SIP returns, power of Compounding: Compound interest is the interest on interest, where the investor gets interest not only on the principal amount but also on the interest that they get on this principal. E.g., if someone invests Rs 1 lakh and get 12 per cent compound interest on it, their total amount after 1 year will be Rs 1.12 lakh; for the second year, they will get interest on Rs 1.12 lakh.
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Is compounding is different in mutual funds?
In mutual funds, specially in equity, there is no interest rate. The value of investment increases or decreases as per the performance of equity stocks the fund has invested its money in. There can be 40 per cent annualised return in 1 year, but there can also be negative returns for the next year. So, is there any compounding in mutual funds?
Is compounding is different in mutual funds?
Compounding in mutual funds doesn't work as it works for the assets with a fixed interest rate. Here, as the price of the net asset value (NAV) rises gradually, the effect of compounding becomes significant in the long run. E.g., if you have purchased an NAV at Rs 10, and its price increases to Rs 200 in 10 years and to Rs 425 in 20 years, the difference of this price works as compounding. The one who has purchased this NAV at Rs 10 will get a significantly higher return than someone who has purchased the same NAV for Rs 200. However, for that, the person who has bought it for Rs 10 needs to be invested for a long time to get the maximum compound benefits.
How compounding in mutual fund works in long term
If an investor invests Rs 1,000 a month for 40 years and gets 12 per cent return on that, their investment in 40 years will be Rs 4,80,000, but their estimated corpus will be Rs 97,93,071.
How compounding in mutual fund works in long term
But if another investor invests Rs 10,000 a month for 20 years, their investment will be Rs 24,00,000, but the estimated corpus will be 91,98,574. Despite investing Rs 19,20,000 more, the estimated return will be less than the Rs 1,000 monthly investment for 40 years.
How compounding in mutual fund works in long term
But if the second person continues their Rs 10,000 monthly SIP investment for 40 years, their investment will be 48,00,000, but the expected corpus will be 10X at Rs 9,79,30,710.
How compounding in mutual fund works in long term
It shows that time plays a key role in the compounding of mutual fund investments. The older the investment, the higher the expected return.
How Rs 7,000 monthly SIP can grow in 10, 20, 30, and 40 years
Here, we will calculate the return on a Rs 7,000 monthly SIP investment at the rate of 12 per cent annualised growth.
Return from Rs 7,000 monthly SIP investment for 10 years
In 10 years, the investment will be Rs 8,40,000, estimated capital gains will be Rs 7,28,251, and the expected amount will be Rs 15,68,251.
Return from Rs 7,000 monthly SIP investment for 20 years
In 20 years, the investment will be Rs 16,80,000, estimated capital gains will be Rs 47,59,001, and the expected amount will be Rs 64,39,001.
Return from Rs 7,000 monthly SIP investment for 30 years
In 30 years, the investment will be Rs 25,20,000, estimated capital gains will be Rs 1,90,46,812, and the expected amount will be Rs 2,15,66,812.
Return from Rs 7,000 monthly SIP investment for 40 years
In 40 years, the investment will be Rs 33,60,000, estimated capital gains will be Rs 6,51,91,497, and the expected amount will be Rs 6,85,51,497.