How SIP returns are calculated
A systematic investment plan looks like a savings account with better returns. It is not, and the difference is the reason the maturity figure is so much larger than people expect: every instalment compounds for a different length of time.
Your first ā¹10,000 has ten years to grow. The one you pay in the final month has one. The total is the sum of a hundred and twenty separate compounding runs, not one.
The formula
For a fixed monthly instalment, the future value is:
FV = P Ć [ ((1 + i)^n ā 1) Ć· i ] Ć (1 + i)
Where:
- P is the monthly instalment
- i is the monthly rate ā the annual rate divided by 12, as a decimal
- n is the number of instalments
The trailing Ć (1 + i) is there because a mandate on the 1st invests at the start of each month, so every instalment earns one extra month of growth. Calculators that omit it are using the end-of-period assumption and will understate your maturity value slightly.
A worked example
ā¹10,000 a month, 12% expected annual return, 10 years.
i = 0.12 Ć· 12 = 0.01
n = 120
FV = 10,000 Ć [ ((1.01)^120 ā 1) Ć· 0.01 ] Ć 1.01
Invested ā¹12,00,000
Maturity value ā¹23,23,391
Gain ā¹11,23,391
You put in ā¹12 lakh and finish with over ā¹23 lakh. Nearly half the final value is growth rather than contribution.
Why time matters more than the amount
Keep the same ā¹10,000 a month and double the period:
| Period | Invested | Maturity value |
|---|---|---|
| 10 years | ā¹12,00,000 | ā¹23,23,391 |
| 20 years | ā¹24,00,000 | ā¹99,91,479 |
Twice the money in, more than four times the value out. The last few years do the heavy lifting, because by then the returns are compounding on a large balance rather than a small one. This is the entire argument for starting early, and it is arithmetic rather than advice.
Stepping up the instalment
If you raise the instalment each year in line with a salary increase, the effect is substantial. The same ā¹10,000 starting instalment with a 10% annual step-up, over 10 years:
Invested ā¹19,12,491
Maturity value ā¹33,74,326
You invest about 59% more and finish with about 45% more than the flat plan ā and the increases track your income rather than requiring a decision.
The assumption that matters
The expected return is an input, not a fact. Equity funds have historically returned something in the region of 12% annualised over long periods in India, but that is an average across time, not a promise for your ten years. Two things follow:
- Run it again at a lower rate. If the plan only works at 14% and falls apart at 9%, it is not a plan.
- Returns are not smooth. The formula assumes a constant monthly rate. Real markets deliver the same average through a sequence of good and bad years, and the sequence matters if you need to withdraw at a particular time.
For an actual investment where money went in and out on irregular dates, the annualised return is an XIRR calculation rather than this formula.
What the formula ignores
- Expense ratio. Fund charges come out of the return, so a 12% gross return at a 1% expense ratio behaves like 11%. Use the net figure.
- Exit load. Many funds charge on redemption within a year.
- Tax. Equity capital gains are taxed on redemption, so the maturity value is not what reaches your bank account.
- Missed instalments. A skipped month is not just that month's money ā it is that money's compounding for the rest of the term.
Try it with your own numbers
The SIP Calculator works this out for any instalment, rate and period, with an optional annual step-up, and shows the split between what you invested and what growth added. For a single investment left to compound, use the lump sum calculator instead.