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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 2,500 monthly SIP for 25 years, a Rs 5,000 monthly SIP for 15 years and a Rs 7,500 monthly SIP for 10 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 2,500 monthly investment for 25 years, Rs 5,000 for 15 years or 7,500 for 10 years?
Scenario 1: Rs 2,500 monthly SIP for 25 years
Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 2,500 for 25 years (300 months) will lead to a corpus of approximately Rs 47.44 lakh (a principal of Rs 4.5 lakh and an expected return of Rs 42.94 lakh).
Scenario 2: Rs 5,000 monthly SIP for 15 years
Similarly, at the same expected return, a monthly SIP of Rs 5,000 for 15 years (180 months) will accumulate wealth of almost Rs 25.23 lakh, as per calculations (a principal of Rs 9 lakh and an expected return of Rs 16.23 lakh).
Scenario 3: Rs 7,500 monthly SIP for 10 years
Similarly, at the same expected return, a monthly SIP of Rs 7,500 for 10 years (120 months) will accumulate wealth to the tune of Rs 17.43 lakh, as per calculations (a Rs 9 lakh principal and an expected return of Rs 8.43 lakh).
ALSO READ: Power of Rs 7,000 SIP: How can you generate Rs 5 crore corpus with just Rs 7,000 monthly investment?
It is worth noticing that in two of the three examples above, the same total 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
30,000
2,023
32,023
2
60,000
8,108
68,108
3
90,000
18,769
1,08,769
4
1,20,000
34,587
1,54,587
5
1,50,000
56,216
2,06,216
6
1,80,000
84,393
2,64,393
7
2,10,000
1,19,947
3,29,947
8
2,40,000
1,63,816
4,03,816
9
2,70,000
2,17,054
4,87,054
10
3,00,000
2,80,848
5,80,848
11
3,30,000
3,56,537
6,86,537
12
3,60,000
4,45,630
8,05,630
13
3,90,000
5,49,828
9,39,828
14
4,20,000
6,71,045
10,91,045
15
4,50,000
8,11,440
12,61,440
16
4,80,000
9,73,445
14,53,445
17
5,10,000
11,59,802
16,69,802
18
5,40,000
13,73,598
19,13,598
19
5,70,000
16,18,314
21,88,314
20
6,00,000
18,97,870
24,97,870
21
6,30,000
22,16,686
28,46,686
22
6,60,000
25,79,740
32,39,740
23
6,90,000
29,92,643
36,82,643
24
7,20,000
34,61,718
41,81,718
25
7,50,000
39,94,088
47,44,088
SIP Estimates at 12% Expected Annualised Return | Scenario 2
Period (in Years)
Investment
Return
Corpus
1
60,000
4,047
64,047
2
1,20,000
16,216
1,36,216
3
1,80,000
37,538
2,17,538
4
2,40,000
69,174
3,09,174
5
3,00,000
1,12,432
4,12,432
6
3,60,000
1,68,785
5,28,785
7
4,20,000
2,39,895
6,59,895
8
4,80,000
3,27,633
8,07,633
9
5,40,000
4,34,108
9,74,108
10
6,00,000
5,61,695
11,61,695
11
6,60,000
7,13,074
13,73,074
12
7,20,000
8,91,261
16,11,261
13
7,80,000
10,99,656
18,79,656
14
8,40,000
13,42,090
21,82,090
15
9,00,000
16,22,880
25,22,880
SIP Estimates at 12% Expected Annualised Return | Scenario 3
Period (in Years)
Investment
Return
Corpus
1
90,000
6,070
96,070
2
1,80,000
24,324
2,04,324
3
2,70,000
56,307
3,26,307
4
3,60,000
1,03,761
4,63,761
5
4,50,000
1,68,648
6,18,648
6
5,40,000
2,53,178
7,93,178
7
6,30,000
3,59,842
9,89,842
8
7,20,000
4,91,449
12,11,449
9
8,10,000
6,51,161
14,61,161
10
9,00,000
8,42,543
17,42,543
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
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