Rs 2,000/month SIP for 30 years vs Rs 6,000/month SIP for 20 years: Which can give higher corpus?
Power of Compounding in SIP Mutual Funds: When it comes to planning for future financial goals, Systematic Investment Plans (SIPs) in mutual funds have consistently emerged as one of the most preferred investment options. It allows investors to contribute monthly, quarterly, or annually based on their financial capacity and convenience. The key to building substantial wealth through SIPs lies in consistency and the power of compounding.
What is an SIP?
SIP, which stands for Systematic Investment Plan, is a method of investing in mutual funds where an investor invests a fixed amount of their choice at regular intervals.
What is Compounding?
Compounding is a financial concept that allows investors to earn returns not only on their principal amount but also on the capital gains generated from previous investments.
Power of Compounding
Over time, compounding can significantly amplify the value of your investments.
How can the power of compounding impact your corpus over time?
In this article, we'll compare two SIP investment scenarios to demonstrate how the power of compounding can impact your corpus over time:
- Rs 2,000 per month SIP for 30 years
- Rs 6,000 per month SIP for 20 years
Assumptions for the Calculation
For both calculations, we are assuming an annualised return rate of 12 per cent, which is a typical historical average for equity mutual funds.
A. Rs 2,000/Month SIP for 30 Years
Now, let’s calculate how much corpus you could generate by investing Rs 2,000 every month for 30 years with a 12 per cent annualised return:
Total Investment
Investing Rs 2,000 each month for 30 years amounts to:
- Rs 2,000 x 12 months x 30 years = Rs 7,20,000
Expected Capital Gain
With an annualised return of 12 per cent, the expected capital gain over 30 years is Rs 63,39,828.
Final Corpus
The total corpus accumulated after 30 years will be:
- Total Investment (Rs 7,20,000) + Capital Gain (Rs 63,39,828) = Rs 70,59,828
Summary of Rs 2,000/Month SIP for 30 Years:
- Total Investment: Rs 7,20,000
- Expected Capital Gain: Rs 63,39,828
- Final Corpus: Rs 70,59,828
B. Rs 6,000/Month SIP for 20 Years
Now, let’s calculate how much corpus can be generated with a higher monthly contribution of Rs 6,000 for 20 years:
Total Investment
Investing Rs 6,000 each month for 20 years amounts to:
- Rs 6,000 x 12 months x 20 years = Rs 14,40,000
Expected Capital Gain:
With the same 12 per cent annualised return, the expected capital gain over 20 years is Rs 45,54,888.
Final Corpus:
The total corpus accumulated after 20 years will be:
- Total Investment (Rs 14,40,000) + Capital Gain (Rs 45,54,888) = Rs 59,94,888
Summary of Rs 6,000/Month SIP for 20 Years:
- Total Investment: Rs 14,40,000
- Expected Capital Gain: Rs 45,54,888
- Final Corpus: Rs 59,94,888
Comparing Rs 2,000/Month SIP for 30 Years vs Rs 6,000/Month SIP for 20 Years: Which SIP generates a higher corpus over time?
- Rs 2,000/month SIP for 30 years generates a total corpus of Rs 70,59,828.
- Rs 6,000/month SIP for 20 years generates a total corpus of Rs 59,94,888.
Conclusion -
While the investment amount in the 20-year scenario is higher (Rs 6,000/month), the longer duration (30 years) for the Rs 2,000/month SIP allows more time for the power of compounding to work its magic, resulting in a higher final corpus.
Starting early is the key
The key takeaway is that starting early and maintaining consistency in your SIP investments leads to significant wealth accumulation over time.