The returns from a Systematic Investment Plan (SIP) depend not just on market performance but also on how long you stay invested. Starting early gives your money more time to compound, while investing larger amounts later may not deliver the same returns, particularly when market volatility and timing come into play.
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A simple way to build wealth, SIPs work by benefitting from two critical factors: rupee cost averaging and the power of compounding. Because you invest the same amount every month, you automatically buy more units when prices are low and fewer when prices are high. As returns are re-invested into your fund, the returns accelerate with the help of compounding.
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SIP also helps develop a habit of saving and investing and has become very popular in India. To understand how timing plays a role, a quick look at two different scenarios:
Rs 5,000 SIP At 25:
SIP amount: Rs 5,000
Investment duration: 35 year
Expected rate of return: 12%
Invested amount: Rs 21,00,000
Estimated returns: Rs 3,03,76,345
Total value: Rs 3,24,76,345
In this case, Rs 5,000 invested over 35 years even without any step-up can become Rs 3.24 crore, with an investment of just Rs 21 lakh. This shows how compounding can accelerate a wealth creation journey if you have a long-term investment horizon.
Rs 15,000 At 35:
SIP amount: Rs 15,000
Investment duration: 25 year
Expected rate of return: 12%
Invested amount: Rs 45,00,000
Estimated returns: Rs 2,39,64,526
Total value: Rs 2,84,64,526
Despite a higher contribution value, the overall corpus manages to reach Rs 2.84 crore. Even as the investment contribution more than doubled in this scenario, the lesser time horizon had an impact on the compounding effect.
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This is why it is suggested to start your SIP journey as soon as possible. At the same time, chasing returns alone should not be your motivation to invest. Striking a balance in your portfolio is critical to ensuring its consistent growth and protection from shocks. For this, a mix of mutual funds, debt funds, gold, and other assets can help you build a long term corpus, while managing risks wisely.
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