First-time investor path · Lesson 4 of 7 · 8 min
SIPs: how small, regular investing compounds
A SIP is not a product and not a return promise — it is an instruction to invest a fixed amount on a fixed day, and its power comes from time in the market.
What a SIP actually is
A Systematic Investment Plan is a standing instruction: on a chosen date each month, a fixed amount buys units of a chosen fund at that day's NAV. When prices are high your money buys fewer units; when prices are low it buys more. This averaging of your purchase price (rupee-cost averaging) is automatic and requires no forecasting.
The real engine is compounding. Returns you earn start earning their own returns, and over long horizons that second-order effect dwarfs the amount you put in. The worked example shows the split for a ₹5,000 SIP: the invested column grows in a straight line, the corpus column curves away from it.
One caution before the maths: the 12% used below is an assumption for illustration — a long-run, equity-style figure, not a promise. Mutual-fund returns are market-linked and vary year to year; a SIP changes neither the fund's risk nor the market's direction.
₹5,000 a month for 10 years
Assumption: ₹5,000 monthly SIP, 12% p.a. assumed return, 10 years. SIP instalments earn from the start of each month (annuity-due).
Monthly rate
12% ÷ 12 = 1% (r = 0.01), n = 120 months
Growth factor
1.01¹²⁰ = 3.3004
SIP future value
₹5,000 × ((3.3004 − 1) ÷ 0.01) × 1.01 = ₹5,000 × 232.34 = ₹11,61,700
Amount actually invested
₹5,000 × 120 = ₹6,00,000
Corpus ≈ ₹11.62L on ₹6L invested — ₹6L of contributions, ~₹5.6L of compounding. Roughly half the ending wealth came from returns earning returns.
Stretch the horizon and watch the gap
Adjust the monthly amount, the assumed return and the years — the widening gap between corpus and invested bars is compounding.
Corpus after 10 years
₹11.62 L
Amount you actually invested
₹6.00 L
The gap between the two bars is compounding — returns earning returns. It dominates only in the later years, which is why starting early beats starting big.
Figures are labelled assumptions for teaching, not forecasts — see the sources note at the end of this lesson.
Misconception check
Your cousin says: 'My SIP gives 12% guaranteed — the calculator showed it.' What's wrong with that sentence?
Ends in a tool
Project your own SIP
Set the amount, horizon and your own assumed return — including annual step-ups — and see the invested-vs-growth split honestly labelled.
Project your own SIPWhere the numbers come from
- Assumption: 12% p.a. return used for illustration (not guaranteed, market-linked)
No live prices or NAVs are used anywhere in this path. Lesson 4 of 7, First-time investor path.
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