Small SIP, Big Impact: Rs 11,111 monthly investment for 15 years or Rs 22,222 for 10 years, which do you think works better?
Power of Compounding: An SIP or systematic investment plan is a popular way of investing in mutual fund schemes of choice, as it enables investors to direct their cash towards a desired equity-related scheme gradually. In this article, let's look at two scenarios to learn about the role time plays when it comes to compounding.
A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to park their surplus cash steadily in their mutual fund scheme of choice. This enables an investor to not only stay committed to their long-term investment strategy but also to maximise the benefit of compounding.
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What is compounding?
For the unversed, compounding grows investments exponentially over time, helping in creating substantial wealth over the years. At times, compounding yields surprising results, especially over longer periods.
Let's compare two examples to understand compounding better
Let's consider two scenarios to understand how time matters in compounding: a Rs 11,111 monthly SIP for 15 years or Rs 22,222 for 10 years.
Can you guess the difference in the outcome in both scenarios at an expected annualised return of 12 per cent?
SIP Return Estimates | Which one will you choose?
Consider the following two options:
- Rs 11,111 monthly investment for 15 years
- Rs 22,222 monthly investment for 10 years
Scenario 1: Rs 11,111 monthly SIP for 15 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 11,111 for 15 years (180 months) will lead to a corpus of approximately Rs 56.06 lakh.
Scenario 1 estimated return explained
The estimated corpus of Rs 56.06 lakh comprises a principal of almost Rs 20 lakh and an expected return of Rs 36.06 lakh.
Scenario 2: Rs 22,222 monthly SIP for 10 years
Similarly, at the same expected return, a monthly SIP of Rs 22,222 for 10 years (120 months) will accumulate wealth to the tune of Rs 51.63 lakh, as per calculations.
Scenario 2 estimated return explained
The estimated corpus of Rs 51.63 lakh comprises a principal of Rs 26.67 lakh and an expected return of Rs 24.97 lakh.
SIP & Compounding | What is compounding and how does it work?
To put it simply, one can understand compounding in SIPs as 'return on return', wherein initial returns get added up to the principal to boost future returns, and so on.
SIP & Compounding
Compounding helps in generating returns on both the original principal and the accumulated interest gradually over time, contributing to exponential growth over longer periods.
SIP & Compounding
This approach eliminates the need for a lump sum investment, making it convenient for many individuals—especially the salaried—to invest in their preferred mutual funds.