An SIP, or systematic investment plan, is a way to invest in mutual funds where investors invest a small amount regularly to build a large corpus rather than investing a big amount at one time. In an SIP, the investment period matters a lot because of compounding benefits. The longer you stay invested, the more you get.
When an investment stays invested for a long period, returns earned in the earlier years also get the opportunity to generate further returns. As the investment period increases, this effect can become much stronger.
Let’s understand with an example of Rs 10,000 per month. Over 10 years, the investor would put in Rs 12 lakh from his or her own pocket. If the same SIP continues for 15 years, the total investment increases to Rs 18 lakh. For 20 years, the investor contributes Rs 24 lakh.
The difference in the amount invested between every five years is only Rs 6 lakh. However, the difference in the final corpus can be much larger because the earlier investments continue to grow.
Let us understand through calculations how a Rs 10,000 monthly SIP could grow over 10, 15 and 20 years if the investment earns an assumed annual return of 10%, 12% or 14%.
Rs 10,000 SIP for 10 years
If a person invests Rs 10,000 per month in mutual funds, they will invest a total of Rs 12 lakh in 10 years. At an assumed return of 10 per cent per annum, the estimated corpus could grow to around Rs 20.66 lakh, as per the calculations.
At a 12 per cent annual return, the amount could be around Rs 23.23 lakh, and if you get a return of 14 per cent, the estimated value could reach around Rs 26.21 lakh.
So, depending on returns, Rs 12 lakh invested over 10 years could potentially build a corpus of roughly Rs 20.66 lakh to Rs 26.21 lakh, calculations show.
Rs 10,000 SIP for 15 years
Now, understand with another example of Rs 10,000 SIP for 15 years. If a person invests Rs 10,000 per month in mutual funds, they will invest a total of Rs 18 lakh in 15 years. At an assumed return of 10 per cent per annum, the estimated corpus could grow to around Rs 41.79 lakh, as per the calculations.
At a 12 per cent annual return, the amount could be around Rs 50.46 lakh, and if you get a return of 14 per cent, the estimated value could reach around Rs 61.29 lakh, calculations show.
This shows the impact of just five additional years. At a 12 per cent return, for example, the corpus rises from around Rs 23.23 lakh after 10 years to Rs 50.46 lakh after 15 years.
The investor contributes only Rs 6 lakh more during those additional five years, but the estimated corpus increases by more than Rs 27 lakh.
Rs 10,000 SIP for 20 years
If the SIP continues for 20 years, the total investment would be Rs 24 lakh.
At an assumed return of 10 per cent, the estimated corpus could reach around Rs 76.57 lakh, calculations show.
At 12 per cent returns, it could grow to approximately Rs 99.91 lakh, which is close to Rs 1 crore, as per the calculations.
At a 14 per cent annual return, the estimated corpus could be around Rs 1.32 crore.
The impact of the second additional five-year period is even bigger. At 12 per cent, the corpus increases from about Rs 50.46 lakh after 15 years to nearly Rs 99.91 lakh after 20 years.
This means an additional investment of Rs 6 lakh over five years could increase the estimated corpus by around Rs 49.45 lakh.
Why do the last few years make such a big difference?
The reason is compounding. Money invested during the early years gets more time to grow. Its returns also remain invested and can earn further returns.
This is why the growth of a long-term SIP is not always uniform. The corpus can rise much faster in later years even if the monthly SIP amount remains unchanged.