Systematic Investment Plans (SIPs) are a popular and convenient way to invest in mutual funds, allowing individuals to invest surplus funds gradually. SIPs enable investors to stay committed to their financial strategy while leveraging the power of compounding. Compounding, often called the eighth wonder of the world, allows investments to grow exponentially over time. This article explores two scenarios to highlight the critical role of time in wealth creation through compounding.
To demonstrate the significance of time in SIPs, we examine two cases:
Both scenarios assume an annualised return of 12%, but the outcomes are vastly different. Let’s delve into the numbers.
Investing ₹1,111 monthly over 30 years amounts to a total contribution of ₹3,99,960. At an annualised return of 12%, this investment grows into a corpus of approximately ₹39.22 lakh.
The long investment horizon allows compounding to work its magic, turning a modest monthly contribution into significant wealth.
A higher monthly SIP of ₹11,111 over 12 years results in a total contribution of ₹15,99,984. Despite the larger contributions, the shorter duration leads to a smaller corpus of ₹35.81 lakh at the same 12% annualised return.
While the investment amount is higher, the shorter timeframe limits the potential for compounding to maximise returns.
Note: The calculations were performed using the Angel One SIP calculator.
The results are clear: time outweighs the amount when it comes to compounding. The ₹1,111 SIP for 30 years produces a larger corpus than the ₹11,111 SIP for 12 years, even though the latter involves a significantly higher investment.
Compounding thrives on time, creating exponential growth that accelerates as the investment horizon increases. This is why starting early, even with smaller amounts, can lead to better financial outcomes over the long run.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Mutual Fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.
Published on: Jan 15, 2025, 3:50 PM IST
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