Small SIP, Big Impact: Rs 1,234 monthly investment for 35 years or Rs 12,345 for 16 years, which do you think works better?

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. 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 two scenarios to understand how time matters in compounding: a Rs 1,234 monthly SIP for 35 years and a Rs 12,345 monthly SIP for 16 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: Rs 1,234 monthly investment for 35 years or Rs 12,345 for 15 years?

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Scenario 1: Rs 1,234 monthly SIP for 35 years

Calculations show that at an annualised 12 per cent return, a monthly SIP of Rs 1,234 for 35 years (420 months) will lead to a corpus of approximately Rs 80.12 lakh (a principal of about Rs 5.18 lakh and an expected return of Rs 74.97 lakh).

Scenario 2: Rs 12,345 monthly SIP for 16 years

Similarly, at the same expected return, a monthly SIP of Rs 12,345 for 16 years (192 months) will accumulate wealth to the tune of Rs 71.77 lakh, as per calculations (a principal of Rs 23.70 lakh and an expected return of Rs 48.07 lakh).

Now, let's look at these estimates in detail (figures in rupees):

Power of Compounding | Scenario 1

Power of Compounding | Scenario 2

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