SIP & Compounding, Why Long Term Investment Matters: A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, as it allows investors to channelise their surplus funds 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. 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. In this article, let’s consider three scenarios to understand how time matters in compounding: a Rs 1,000 monthly SIP for 20 years, Rs 4,000 for 5 years and Rs 10,000 for 2 years.
Can you guess the difference in the outcome in all three scenarios at an expected annualised return of 12 per cent?
SIP Return Estimates | Which one will you choose: Rs 1,000 monthly investment for 20 years, Rs 4,000 for 5 years or 10,000 for 2 years?
Scenario 1: Rs 1,000 monthly SIP for 20 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,000 for 20 years (240 months) will lead to a corpus of approximately Rs 9.99 lakh (a principal of Rs 2.40 lakh and an expected return of Rs 7.59 lakh).
Scenario 2: Rs 4,000 monthly SIP for 5 years
Similarly, at the same expected return, a monthly SIP of Rs 4,000 for 5 years (60 months) will accumulate wealth of almost Rs 3.30 lakh, as per calculations (a principal of Rs 2.40 lakh and an expected return of Rs 89,945).
Scenario 3: Rs 10,000 monthly SIP for 2 years
Similarly, at the same expected return, a monthly SIP of Rs 10,000 for 2 years (24 months) will accumulate wealth to the tune of Rs 2.72 lakh, as per calculations (a Rs 2.40 lakh principal and an expected return of Rs 32,432).
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In all three examples, the same amount is invested in different timeframes. Now, let’s look at these estimates in detail (figures in rupees):
SIP Estimates at 12% Expected Annualised Return | Scenario 1
| Period (in Years) | Investment | Return | Corpus |
| 1 | 12,000 | 809 | 12,809 |
| 2 | 24,000 | 3,243 | 27,243 |
| 3 | 36,000 | 7,508 | 43,508 |
| 4 | 48,000 | 13,835 | 61,835 |
| 5 | 60,000 | 22,486 | 82,486 |
| 6 | 72,000 | 33,757 | 1,05,757 |
| 7 | 84,000 | 47,979 | 1,31,979 |
| 8 | 96,000 | 65,527 | 1,61,527 |
| 9 | 1,08,000 | 86,822 | 1,94,822 |
| 10 | 1,20,000 | 1,12,339 | 2,32,339 |
| 11 | 1,32,000 | 1,42,615 | 2,74,615 |
| 12 | 1,44,000 | 1,78,252 | 3,22,252 |
| 13 | 1,56,000 | 2,19,931 | 3,75,931 |
| 14 | 1,68,000 | 2,68,418 | 4,36,418 |
| 15 | 1,80,000 | 3,24,576 | 5,04,576 |
| 16 | 1,92,000 | 3,89,378 | 5,81,378 |
| 17 | 2,04,000 | 4,63,921 | 6,67,921 |
| 18 | 2,16,000 | 5,49,439 | 7,65,439 |
| 19 | 2,28,000 | 6,47,325 | 8,75,325 |
| 20 | 2,40,000 | 7,59,148 | 9,99,148 |
SIP Estimates at 12% Expected Annualised Return | Scenario 2
| Period (in Years) | Investment | Return | Corpus |
| 1 | 48,000 | 3,237 | 51,237 |
| 2 | 96,000 | 12,973 | 1,08,973 |
| 3 | 1,44,000 | 30,031 | 1,74,031 |
| 4 | 1,92,000 | 55,339 | 2,47,339 |
| 5 | 2,40,000 | 89,945 | 3,29,945 |
SIP Estimates at 12% Expected Annualised Return | Scenario 3
| Period (in Years) | Investment | Return | Corpus |
| 1 | 1,20,000 | 8,093 | 1,28,093 |
| 2 | 2,40,000 | 32,432 | 2,72,432 |
ALSO READ: PPF For Regular Income: How can you get Rs 60,000/month tax-free income from Public Provident Fund?
SIP & Compounding | What is compounding and how does it work?
For the sake of simplicity, 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.
Compounding helps in generating returns on both the original principal and the accumulated interest gradually over time, contributing to exponential growth over longer periods.
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. Read more on the power of compounding
Source:https://www.zeebiz.com/personal-finance/news-rs-1000-monthly-sip-for-20-yrs-or-4000-for-5-yrs-or-10000-for-2-years-which-works-best-at-same-expected-return-348405