Compounding Returns: Rs 5,000 monthly SIP investment for 30 years vs Rs 17,500 monthly SIP for 20 years? Which can give higher return? Know here
Power of Compounding: Small-amount investment that is made for a long duration can generate a higher corpus compared to the fund generated from large-amount investment. Compounding of returns plays a key role in this phenomenal growth.
Compounding Returns, SIP Returns: Have a little amount to invest and feel discouraged to start investing because of that? That's a common aspect why people don't invest. They think that even if they start investing with a little amount, how will it make a difference to their life's financial goals. But that's like neglecting the power of compounding. If you are investing to achieve your financial goals such as retirement, the investment duration needs to be long. With that, even if you start with a small amount and gradually increase with your income rise, you can generate a larger corpus against someone who begins with a large amount but wants to invest for a short duration.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
How power of compounding plays a role
In compounding, you get returns on your overall investment, so the longer your investment duration is, the faster your investments are likely to grow.
Examples of compounding
A and B start monthly mutual fund SIP investments in mutual funds. A invests Rs 2,000 monthly, while B invests Rs 6,000 a month. Both get 12 per cent annualised return on their investments. A's investment duration is 30 years, while B's is 20 years.
Examples of compounding
A's estimated corpus in 30 years will be Rs 70,59,828, on investment of Rs 7,20,000, while B's will be Rs 59,94,888 on investment of Rs 14,40,000.
Another example of compounding
A and B have set the retirement corpus target of Rs 5 crore. A has 30 years to achieve that target, while B has 20 years. Both are expecting 12 per cent annualised return on their investments.
Another example of compounding
A can achieve that target with estimated monthly investment of Rs 14,200, and the overall investment of 51,12,000 in 30 years.
B will achieve that target with estimated monthly SIP investment of Rs 50,100, and the overall investment of Rs 5,00,57,311.
Investments for compound returns
Many fixed interest investment schemes offer compound interest. On the other hand, a lot of market-linked schemes, such as mutual funds, provide compound growth on investments.
Calculation for our story
We will calculate returns on Rs 5,000 monthly SIP for 30 years and Rs 17,500 monthly SIP investment for 20 years. In either case, the annualised return on investment will be 12 per cent.
Corpus on Rs 5,000 monthly investment for 30 years
In 30 years, the total investment on Rs 5,000 monthly SIP investment 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.
Corpus on Rs 17,500 monthly investment for 20 years
On a Rs 17,500 monthly investment for 20 years, the total investment will be Rs 42,00,000, estimated capital gains will be Rs 1,32,85,089, and the estimated corpus will be Rs 1,74,85,089.
What is the outcome?
We saw that on Rs 17,500 investment, the extra investment compared to Rs 5,000 monthly investment is Rs 24,00,000. However, because of compounding, the extra corpus generated on Rs 5,000 monthly investment is Rs 1,64,480.