Power of Compounding in SIP :The role of compounding in investment and savings is no less than magic. Compounding means earning returns on returns, due to which its impact on long-term investments is huge. If you add a little boost of compounding to your retirement planning, it will be of tremendous benefit. And for this, you will have to plan for your retirement as soon as possible, so that you get long time to invest. We have done the calculation here, in which just 2 years and 2% return difference can make 93% difference in your retirement corpus.
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What is power of compounding?
Power of compounding means earning returns on returns. That means, you also get interest on the principal amount you have deposited. It can be understood that if you have invested Rs 1 lakh somewhere and get 10 per cent annual return on it, then it will be Rs 110,000 after one year. Next year you will get interest on this Rs 110000. This process of getting interest on interest will continue as long as your investment remains or till the maturity period.
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If you want to see the maximum effect of power of compounding, then you can see the example of mutual fund SIP. The benefit of compounding is also available in fixed income schemes. In fixed income schemes, one gets the benefit of compounding according to a fixed interest. At the same time, the interest received on interest in SIP can be more or less. However, if we talk about long term SIP, 12 to 15 percent annualized return is very common.
Case 1: Investment for 25 years, interest 12% per annum
Monthly SIP: Rs 5000
Estimated return: 12% per annum
Investment period: 25 years
Total investment in 25 years: Rs 15,00,000 (Rs 15 lakh)
SIP value after 25 years: Rs 85,11,033 (Rs 85 lakh)
Total profit: Rs 70,11,033 (Rs 70 lakh)
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Case 2: Investment for 28 years, interest 13% per annum
Monthly SIP: Rs 5000
Estimated return: 13% per annum
Investment period: 28 years
Total investment in 28 years: Rs 16,80,000 (Rs 16.8 lakh)
SIP value after 28 years: Rs 1,46,22,103 (Rs 1.5 crore)
Total profit: Rs 1,29,42,103 (Rs 1.3 crore)
Case 3: Investment for 30 years, interest 15% per annum
Monthly SIP: Rs 5000
Estimated Returns: 15% per annum
Investment period: 30 years
Total investment in 30 years: Rs 18,00,000 (Rs 18 lakh)
SIP value after 30 years: Rs 2,81,58,852 (Rs 2.82 crore)
Total profit: Rs 2,63,58,852 (Rs 2.6 crore)
Investing Rules: Money has to double in 6 years and triple in 10 years, invest in the scheme giving how much interest, rules 72 and 114 will help.
result
It is clear from the calculation that if we invest (SIP) for 28 years and the expected return is 13 percent per annum, then the total retirement corpus will be Rs 1,46,22,103 (Rs 1.5 crore).
Whereas if we increase the investment (SIP) period by 2 years and get 2% more return on it, then the total retirement corpus will be Rs 2,81,58,852 (Rs 2.82 crore). The chances of increasing returns also increase in long term SIP.
(source: SIP calculator, compounding calculator)
