A monthly Systematic Investment Plan (SIP) of Rs 10,000 may seem modest at first, but over the long term, the difference between an annualised return of 8% and 12% can significantly affect how much wealth an investor accumulates. The reason is compounding: returns earned on investments can generate further returns over time, allowing the investment corpus to grow faster as the investment horizon increases.
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Investors must note that a higher return is not guaranteed. An 8% or 12% return in this comparison is an assumption used to illustrate how different growth rates can affect the same investment amount. Actual mutual fund returns depend on market conditions, the fund’s performance and the investment period.
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To understand the potential difference, let’s compare a monthly SIP of Rs 10,000 across investment horizons of 10, 20 and 30 years, assuming annualised returns of 8% and 12%.
Rs 10,000 SIP at 8% vs 12%: The calculations
For this comparison, consider the monthly SIP is invested at the beginning of each month, with returns compounded at a monthly rate equivalent to the assumed annual return. The calculations use the SIP future-value formula described by HDFC Mutual Fund.
The annual returns are converted into effective monthly rates using:
i=(1+R)1/12-1
Here,
R is the assumed annual return
i is the effective monthly return.
The future value is then calculated as:
FV=P(1+i)n-1i(1+i)
Where:
P = monthly SIP amount of Rs 10,000
i = effective monthly return
n = total number of monthly instalments
FV = estimated value of the investment at the end of the period
The final multiplier, (1+i), accounts for contributions being made at the beginning rather than the end of each month.
https://docs.google.com/spreadsheets/d/1OyL-D2I3wdR0W7E-8bGjIY0Hv7Jq5gzMDA_0vm5pvjw/edit?gid=0#gid=0
Figures are rounded to two decimal places in lakh or crore. The calculations use unrounded values before rounding the displayed figures.
How much wealth could you miss out on?
The difference between the two return assumptions grows as the investment period increases. While the gap is around Rs 4.28 lakh over 10 years, it rises to approximately Rs 34.72 lakh over 20 years.
Over 30 years, the difference reaches nearly Rs 1.66 crore. Both investors contribute the same Rs 36 lakh over this period, but their estimated final corpus differs because of the assumed rates of return and the effect of compounding.
At an assumed 8% annual return, the monthly SIP could grow to around Rs 1.42 crore over 30 years. At 12%, the estimated corpus could reach approximately Rs 3.08 crore.
This shows why even a seemingly small difference in annualised returns can substantially affect long-term wealth creation. However, it does not mean that an investor who chooses a particular mutual fund will necessarily earn 8% or 12% every year.
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Investors should also consider inflation, applicable taxes, and investment costs when assessing what their accumulated wealth may be worth in the future.
A Rs 10,000 monthly SIP can build a substantial corpus over the long term, but the final amount depends on returns and the investment duration. Under these assumptions, the difference between an 8% and a 12% annualised return is about Rs 1.66 crore over 30 years.
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