Anyone who has invested in mutual funds or other financial instruments would have noticed one thing. In the initial years, money seems to grow slowly. It often feels like your investments are not making much progress. But if you stay invested, compounding begins to work efficiently in your favour and your wealth starts growing much faster than it did in the early years.
This is exactly why many investors are surprised to learn that while building the first Rs 50 lakh through a mutual fund SIP can take several years, the journey from Rs 50 lakh to Rs 1 crore can be much shorter.
Take a simple example.
Suppose you invest Rs 50,000 every month through a mutual fund SIP and earn an annualised return of 12%. It takes nearly 6 years to build a corpus of around Rs 50 lakh. For many investors, this phase can feel slow, making them wonder whether their investments are growing fast enough.
But the story changes after that.
Once the corpus reaches around Rs 50 lakh, it takes less than 4 years for it to cross the Rs 1 crore mark. The second Rs 50 lakh comes much faster than the first, even though the monthly SIP remains the same.
It happens because your existing investments begin generating larger returns as the corpus grows. Every year, your money earns returns, and those returns start earning returns of their own. This is the power of compounding at work.
The early years of investing are usually about building the foundation. The later years are when that foundation starts working much harder for you. That is why financial planners often say that the biggest reward in investing goes not just to those who invest regularly, but to those who stay invested long enough.
The numbers in this example show exactly how this happens. They also answer an important question many investors have: Is assuming a 12% long-term return from equity mutual funds realistic?
To find out, let’s first look at the SIP calculations and then compare them with the long-term performance of major equity mutual fund categories.
How a Rs 50,000 monthly SIP crosses Rs 1 crore
Let’s look at the numbers.
Assume you invest Rs 50,000 every month in an equity mutual fund through a SIP and earn an annualised 12% XIRR over the long term.
After 6 years
Monthly SIP: Rs 50,000
Total investment: Rs 36,00,000
Estimated gains: Rs 15,80,127
Total corpus: Rs 51,80,127
So, it takes nearly six years to build the first Rs 50 lakh.
Now look at what happens next.
After 10 years
Total investment: Rs 60,00,000
Estimated gains: Rs 52,01,794
Total corpus: Rs 1,12,01,794
In the next four years, your corpus grows from about Rs 52 lakh to more than Rs 1.12 crore. In other words, the portfolio adds over Rs 60 lakh, even though your additional investment during these four years is only Rs 24 lakh.
This is the point where compounding starts becoming clearly visible.
In the initial years, most of the portfolio comes from the money you invest every month. But as the corpus grows larger, the returns generated by the existing investments also become much bigger. Those gains are then reinvested and begin generating their own returns.
That is why wealth creation often looks slow in the beginning but gathers pace later. Investors who remain disciplined and continue their SIPs are usually the ones who benefit the most from this acceleration.
But is a 12% annualised return a realistic assumption?
The calculations above are based on an annualised return of 12%. Naturally, the next question is whether such a return is realistic over the long term.
No one can predict future returns, and mutual fund performance is never guaranteed. However, historical data can help us understand whether a 12% annualised return is a reasonable assumption for long-term equity investing.
To find out, let’s look at the average returns delivered by some of the biggest equity mutual fund categories over the last five and 10 years, based on Value Research data. The analysis includes the major diversified equity categories such as large-cap, flexi-cap, large & mid-cap, mid-cap and small-cap funds. Thematic, sectoral and international fund categories have been excluded.
The data shows that most diversified equity fund categories have delivered average annualised returns of around 12% or more over both five- and 10-year periods.
| Mutual fund category | 5-year CAGR | 10-year CAGR |
| Mid-cap funds | 15.77% | 15.55% |
| Small-cap funds | 15.30% | 16.21% |
| Large & Mid-cap funds | 13.19% | 13.81% |
| Flexi-cap funds | 11.55% | 12.68% |
| Large-cap funds | 10.31% | 11.62% |
(Source: Value Research)
A clear trend emerges from the numbers.
Mid-cap and small-cap funds have comfortably delivered annualised returns above 15% over both time periods. Large & mid-cap funds have also remained well above the 12% mark. Flexi-cap funds have been close to or above 12%, depending on the investment horizon.
Only the large-cap category has delivered average returns below 12%.
This suggests that assuming a 12% long-term return is not an unrealistic expectation for equity mutual funds as an asset class, particularly for diversified portfolios. At the same time, investors should remember that these are historical returns. Future performance can be different, and returns may vary across market cycles.
The important takeaway is not that every fund will deliver 12% every year. Rather, history shows that equity investing over long periods has had the potential to generate returns around this level, which is why compounding becomes so powerful for disciplined SIP investors.
What do the best SIP-performing funds tell us?
Category averages give us a broad picture of how different segments of the mutual fund market have performed. But individual funds can deliver very different outcomes.
To understand this better, we analysed the SIP returns of nearly 600 active equity mutual funds across the major diversified equity categories using Value Research data.
The analysis shows a wide range of outcomes. SIP returns among these funds range from 6.62% to 25.42% XIRR over the relevant investment period.
One finding stands out. Only around 30 funds have delivered SIP returns of less than 12%. The vast majority of active equity funds have generated SIP returns above this level.
Many of the top-performing SIP funds belong to the mid-cap and small-cap categories, which is consistent with the strong long-term category returns seen earlier. These segments have benefited from broader market rallies and higher earnings growth among smaller companies over the past decade.
The data also highlights an important point for investors. While some funds have significantly outperformed both their category averages and benchmark indices, not every fund has produced exceptional returns. Performance has varied widely across schemes.
This is why investors should not chase the latest top performer alone. Instead, choosing a quality fund, staying invested through market cycles and continuing SIPs consistently often plays a much bigger role in long-term wealth creation than trying to switch funds in search of the next winner.
The numbers reinforce the central message of this story. Building wealth through SIPs is not just about selecting the best-performing fund. It is equally about giving your investments enough time for compounding to work in your favour.
Why many investors never experience this phase of compounding
If the mathematics of compounding is so powerful, why don’t more investors end up building large portfolios?
The answer often has less to do with returns and more to do with investor behaviour.
Many investors start a SIP with a long-term goal but lose patience after a few years. When markets become volatile or returns remain muted for some time, they stop their SIPs, redeem their investments or switch to another fund hoping for quicker gains.
This is often when they make their biggest mistake.
The early years of a SIP are usually the slowest because the investment corpus is still small. Most of the portfolio consists of the money invested by the investor, while the gains are relatively modest. As a result, wealth creation appears slow.
However, once the corpus becomes sizeable, the returns generated by the existing investments also become larger. That is when compounding starts making a visible difference to the portfolio.
Investors who exit during the initial years may never reach this stage. By interrupting their investment journey, they also interrupt the compounding process that could have accelerated their wealth creation later.
Financial planners often say that successful investing is not just about finding the best mutual fund. It is also about staying invested long enough for compounding to do its job. A disciplined SIP combined with patience can often create better long-term outcomes than frequently changing investment strategies.
That is why time in the market remains one of the biggest advantages an SIP investor can have. The longer the investment horizon, the greater the opportunity for compounding to multiply wealth.
Disclaimer: The calculations in this article are illustrative and are based on a hypothetical monthly SIP earning an assumed annualised return (XIRR) of 12%. Mutual fund investments are subject to market risks, and actual returns may be higher or lower depending on market conditions, the fund chosen and the investment period.
Historical performance does not guarantee future returns. The category return data cited is based on Value Research data and is intended for informational purposes only. Investors should assess their financial goals and risk appetite and, if necessary, consult a qualified financial adviser before making investment decisions.
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