Wealth creation is more of a marathon rather than a sprint. It involves long-term strategy, patience and consistency. The longer you stay invested, the higher the potential returns due to the power of compounding. Mutual funds systematic investment plans (SIPs) have become preferred investment instruments for long-term wealth accumulation for Indian investors.
Through SIPs, investors can contribute a fixed amount regularly, typically every month, to build a large corpus over the years. The power of compounding and rupee cost averaging helps to generate substantial returns with even modest investments. However, many investors often face a dilemma: how much should they invest and for how long?
Let's find a solution to this confusion through two SIP investment scenarios:
Rs 2,000 Monthly SIP For 25 Years Vs Rs 20,000 Per Month For 5 Years
Assuming an average return of 12% per annum that is typical for equity mutual funds over the long term as per past trends, here's what investors can expect:
Scenario 1: Rs 2,000 Per Month For 25 Years
Monthly SIP: Rs 2,000
Expected rate of return: 12%
Invested amount: Rs 6,00,000
Estimated returns: Rs 31,95,270
Total value: Rs 37,95,270
Scenario 2: Rs 20,000 Per Month For 5 Years
Monthly SIP: Rs 20,000
Expected rate of return: 12%
Invested amount: Rs 12,00,000
Estimated returns: Rs 4,49,727
Total value: Rs 16,49,727
Also Read: How To Become Crorepati In 10 Years With SIP: Investment Formula Explained
Key Takeaways
The calculations above clearly highlight how a longer duration allows compounding to work its magic, despite an individual investing only half the money in Scenario 1 (Rs 6 lakh vs Rs 12 lakh). SIPs reward time in the market. Even a smaller, consistent investment over 25 years can easily beat a large but short-term investment of Rs 20,000 for five years.
Also, short-term SIPs are considered more vulnerable to market cycles, while longer-term SIPs smooth out volatility.
A major takeaway here is to start the investment journey early. Even small amounts invested on a regular basis can grow into substantial wealth over a period of time.
The five-year SIP period does not provide enough time for compounding to deliver exponential growth.
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