Systematic Investment Plan (SIP) is a popular method of investing in mutual funds as it allows investors to utilize their surplus funds in a step-by-step manner in an equity-related mutual fund scheme of their choice. This way, investors can not only focus on their investment strategy but also take advantage of the power of compound interest. For the uninitiated, compound interest can help your investments grow exponentially over time and generate large amounts of wealth over many years. In some cases, compounding, especially over a long period of time, can yield surprising results.
In this article, let’s look at two scenarios: Rs 2,100 SIP per month for 20 years and Rs 5,100 SIP per month for 10 years to understand how time matters in compound interest calculations. Can you guess the difference between both outcomes at a conservative expected annual rate of 12%?
SIP Return Estimate | Would you rather invest Rs 2,100 every month for 20 years or Rs 5,100 every month for 10 years?
Scenario 1: SIP Rs 2,100 per month for 20 years
As per the calculations, at 12% annual return, a monthly SIP of Rs 2,100 for 20 years (240 months) will give you a corpus of around Rs 20.98 lakh.
Scenario 2: SIP Rs 5,100 per month for 10 years
Similarly, with the same expected return, a monthly SIP of Rs 5,100 for 10 years (120 months) will accumulate wealth of around Rs 11.85 lakh, as per our calculations.
So, let’s take a closer look at these estimates (figures in rupees).
Combined Power | Scenario 1: Monthly SIP of Rs 2,100 for 20 years
| Period (years) | investment | return | corpus |
| 1 | 25,200 | 1,700 | 26,900 |
| 2 | 50,400 | 6,811 | 57,211 |
| 3 | 75,600 | 15,766 | 91,366 |
| 4 | 1,00,800 | 29,053 | 1,29,853 |
| 5 | 1,26,000 | 47,221 | 1,73,221 |
| 6 | 1,51,200 | 70,890 | 2,22,090 |
| 7 | 1,76,400 | 1,00,756 | 2,77,156 |
| 8 | 2,01,600 | 1,37,606 | 3,39,206 |
| 9 | 2,26,800 | 1,82,325 | 4,09,125 |
| 10 | 2,52,000 | 2,35,912 | 4,87,912 |
| 11 | 2,77,200 | 2,99,491 | 5,76,691 |
| 12 | 3,02,400 | 3,74,330 | 6,76,730 |
| 13 | 3,27,600 | 4,61,855 | 7,89,455 |
| 14 | 3,52,800 | 5,63,678 | 9,16,478 |
| 15 | 3,78,000 | 6,81,610 | 10,59,610 |
| 16 | 4,03,200 | 8,17,694 | 12,20,894 |
| 17 | 4,28,400 | 9,74,234 | 14,02,634 |
| 18 | 4,53,600 | 11,53,822 | 16,07,422 |
| 19 | 4,78,800 | 13,59,383 | 18,38,183 |
| 20 | 5,04,000 | 15,94,211 | 20,98,211 |
Combined Power | Scenario 2: SIP Rs 5,100 per month for 10 years
| Duration (in years) | investment | return | corpus |
| 1 | 61,200 | 4,128 | 65,328 |
| 2 | 1,22,400 | 16,540 | 1,38,940 |
| 3 | 1,83,600 | 38,289 | 2,21,889 |
| 4 | 2,44,800 | 70,558 | 3,15,358 |
| 5 | 3,06,000 | 1,14,680 | 4,20,680 |
| 6 | 3,67,200 | 1,72,161 | 5,39,361 |
| 7 | 4,28,400 | 2,44,693 | 6,73,093 |
| 8 | 4,89,600 | 3,34,185 | 8,23,785 |
| 9 | 5,50,800 | 4,42,790 | 9,93,590 |
| 10 | 6,12,000 | 5,72,929 | 11,84,929 |
Compounding with SIP | What is compound interest and how does it work?
Simply put, compound interest helps generate profits over time from both principal and accumulated interest, contributing to exponential growth over time.
To keep things simple, compound interest in SIPs can be understood as ‘return on return’. That is, initial earnings are added to principal to increase future earnings, and so on.
This approach eliminates the need for lump sum investments and makes it easier for many individuals, especially salaried workers, to invest in their preferred mutual funds. Read more about the power of compound interest
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