How SIP compounding actually works: the real maths, the inflection point, and why the last 5 years matter most

For informational purposes only. Ek Crore does not recommend specific investments. All corpus figures in this article are mathematical illustrations based on assumed rates of return. Actual mutual fund returns depend on market performance, fund choice, and timing — past performance is not indicative of future results. Consult a SEBI-registered investment advisor for personalised guidance.

Most articles about Systematic Investment Plans use phrases like "the magic of compounding" or "let your money work for you." These are accurate, but they skip the mechanism. This article shows the actual SIP future value formula, walks through what your corpus looks like at each decade, identifies exactly when compounding visibly accelerates, and shows you how sensitive the outcome is to the assumed rate of return.

The numbers are not predictions. They are the mathematical output of a formula applied to specific assumptions. Understanding the formula lets you reason honestly about what SIPs can and cannot do for you.

The SIP formula: how corpus is calculated

The future value of a monthly SIP is calculated as:

```

FV = P × ((1 + r)^n − 1) / r × (1 + r)

```

Where:

• P = monthly SIP amount in rupees
• r = monthly return rate = annual CAGR / 12
• n = total number of months of investment
• FV = corpus at the end of n months

Example: ₹10,000/month for 20 years at 12% annual CAGR:

• r = 12% / 12 = 1% = 0.01
• n = 20 × 12 = 240 months
• FV = 10,000 × ((1.01^240 − 1) / 0.01) × 1.01 = 10,000 × (9.89 / 0.01) × 1.01 = 10,000 × 989 × 1.01 = ₹99.9 lakh

Total invested over 20 years: ₹10,000 × 240 = ₹24,00,000.

The corpus (₹99.9L) is 4.2× what you put in. The extra ₹75.9L comes from returns on returns, which is compounding.

◇ Quick check: You can verify any SIP scenario using this formula. The AMFI SIP calculator at amfiindia.com uses the same formula and serves as an independent cross-check.

The lifecycle table: corpus at year 5, 10, 15, 20, and 25

The table below shows corpus across two SIP amounts and three return assumptions. All figures are computed using the SIP future value formula above.

₹5,000 per month:

₹10,000 per month:

Illustration only. Computed using the standard SIP future value formula at constant assumed CAGR. Actual returns are not constant and depend on market performance.

When compounding actually becomes visible: the inflection point

The phrase "let your money work for you" implies compounding is instant and always dominant. It is not. In the first few years of a SIP, your corpus is driven more by your monthly contributions than by returns.

At ₹10,000/month, 12% CAGR:

• Year 5: Total invested ₹6L, corpus ₹8.2L. Returns account for ₹2.2L (27% of corpus).
• Year 10: Total invested ₹12L, corpus ₹23.2L. Returns account for ₹11.2L (48% of corpus).
• Year 10.5 (approx): Returns first exceed total cumulative investment. The crossover.
• Year 15: Total invested ₹18L, corpus ₹50.4L. Returns account for ₹32.4L (64% of corpus).
• Year 20: Total invested ₹24L, corpus ₹99.9L. Returns account for ₹75.9L (76% of corpus).
• Year 25: Total invested ₹30L, corpus ₹1.90 crore. Returns account for ₹1.60 crore (84% of corpus).

The inflection point — where returns first exceed what you have contributed — arrives at approximately year 10.5 at 12% CAGR. Before that, your contributions are still the dominant driver of corpus growth. After that, the returns engine starts doing more work than your wallet.

This is why financial planners say "start early." Starting 5 years later does not just cost you 5 years of contributions. It delays the inflection point by 5 years, which costs a disproportionate amount of compounded returns in the final years.

The counter-intuitive finding: the last 5 years add more than all 25 years of contributions

At ₹10,000/month, 12% CAGR:

• Corpus at year 20: ₹99.9 lakh
• Corpus at year 25: ₹1.90 crore
• Corpus added in years 20–25: ₹90 lakh

Total amount contributed over all 25 years: ₹30 lakh.

The final 5 years of a 25-year SIP add ₹90 lakh to the corpus — 3× more than all 25 years of contributions combined. This growth comes almost entirely from returns on the already-large corpus, not from the new monthly SIP amounts going in.

This is compounding in its fully mature state. In year 25, you are contributing ₹10,000/month. But the ₹1.90 crore corpus is also earning returns: 1% per month on ₹1.90 crore = ₹1.90 lakh just in returns in that single month. Your ₹10,000 monthly SIP is adding about 5% as much as the corpus itself is compounding.

The implication: The most damaging thing you can do to a long-term SIP is stop it in the later years. Stopping a 25-year SIP at year 20 costs you the most powerful 5 years of compounding. Stopping at year 18 is even more damaging relative to what could have been.

Sensitivity test: why 2% difference in CAGR is not a small number

A common objection to compounding illustrations is: "The return assumptions are too optimistic." This is fair. Let us look at what the corpus difference actually is across three return scenarios.

₹10,000/month for 25 years:

• At 10% CAGR: ₹1.34 crore
• At 12% CAGR: ₹1.90 crore
• At 14% CAGR: ₹2.72 crore

The difference between 10% and 12% CAGR over 25 years is ₹56 lakh — nearly 2× the total investment of ₹30 lakh. The difference between 10% and 14% CAGR is ₹1.38 crore.

A 2% difference in annual CAGR does not sound large. Compounded over 25 years on a growing monthly investment, it is transformative.

What drives CAGR in practice:

• Fund category: equity funds historically outperform debt over long periods, but with higher short-term volatility
• Expense ratio: a fund charging 1.5% expense ratio delivers approximately 1.5% less CAGR than a direct plan equivalent. Over 25 years, this matters enormously
• Asset class mix: an all-equity SIP will have a different risk-return profile than a balanced fund SIP
• Market timing luck: a SIP started at a market peak will have worse initial returns than one started during a correction, though dollar-cost averaging reduces (but does not eliminate) this effect

Source: AMFI SIP calculator · AMFI India

What a SIP does not do

It does not guarantee returns. All corpus figures above assume a constant CAGR. Real markets do not move at constant rates. There are years of negative return (2008: Nifty fell ~52%, 2020: Nifty fell ~38% before recovering). A SIP started in January 2008 would have seen its early corpus halved by October 2008. By 2018, after 10 years, it would still have generated positive returns due to continued buying at lower prices — but the path is not smooth.

It does not fix poor fund selection. A SIP in a consistently underperforming fund earns less CAGR. The compounding formula is neutral; it amplifies both good and poor fund performance equally. A fund with 8% actual CAGR over 25 years produces a very different corpus from one earning 12%.

It does not replace the need for financial planning. A corpus of ₹1.90 crore after 25 years is significant, but is it enough? The answer depends on what you need: where you live, what your expenses will be in retirement, whether you have dependents, other sources of income. A SIP is a tool, not a plan.

It does not require market timing. This is a genuine advantage. A monthly SIP buys more units when prices are low (bearish months) and fewer when prices are high. This is called rupee-cost averaging. It does not maximise returns, but it removes the psychological pressure and financial error of trying to time the market.

⚠ Common mistake: Stopping a SIP during a market downturn. The months when markets are down and you feel worst about equity investments are the months when your fixed SIP amount buys the most units at the lowest price. Stopping the SIP in a down market locks in the loss and misses the recovery.

Bottom line

• The SIP future value formula is: FV = P × ((1+r)^n – 1) / r × (1+r); apply it to your own numbers
• At ₹10,000/month over 25 years, the corpus ranges from ₹1.34 crore (at 10% CAGR) to ₹2.72 crore (at 14% CAGR): illustration only
• Compounding becomes visibly dominant after approximately 10–11 years at 12% CAGR; the first decade is contribution-led growth
• The final 5 years of a 25-year SIP add more corpus than all 25 years of contributions combined — stopping early is the most expensive mistake
• A 2% difference in CAGR over 25 years produces a ₹56 lakh difference in terminal corpus on ₹10,000/month; expense ratio and fund selection matter
• SIP does not guarantee returns; it reduces market-timing risk and enforces discipline, not outperformance

Frequently asked questions

Q: At what monthly SIP amount do I reach ₹1 crore in 15 years?

A: At 12% CAGR, ₹10,000/month produces approximately ₹50.5 lakh in 15 years. To reach ₹1 crore in 15 years at 12% CAGR, you need approximately ₹20,000/month. At 10% CAGR, you need approximately ₹24,000/month. These are illustrations — actual outcomes depend on market performance.

Q: Is lump-sum investment better than SIP?

A: If you have a lump sum to invest and markets are at a trough, lump-sum produces a better final corpus than SIP spread over time, because the entire amount benefits from the recovery. If markets are at a peak, SIP's rupee-cost averaging reduces the impact of the peak entry. Since you generally cannot reliably predict peaks and troughs, SIP is the more practical and psychologically manageable approach for ongoing savings from salary.

Q: Does increasing my SIP every year help significantly?

A: Yes. A step-up SIP (increasing by 10% annually) produces a meaningfully larger corpus than a flat SIP, because the increasing contributions compound for shorter periods but still add to the overall base. If your salary grows each year, a step-up SIP aligns your investment with your income growth.

Q: My SIP is in a large-cap equity fund. What realistic CAGR should I plan for?

A: Historical 15–20 year rolling returns for Nifty 50 index funds in India have been in the 11–14% range, though this varies with entry and exit timing. The SPIVA India scorecard shows that most actively managed large-cap funds underperform the Nifty 50 over long periods after expenses. For planning purposes, using 10–11% for a conservative scenario and 12% for a base scenario is reasonable — but label any projections as illustrations, not forecasts.

Q: Can I pause my SIP if I face a financial emergency?

A: Yes. Most mutual funds allow you to pause a SIP for 1–3 months without exiting. Pausing is far better than stopping entirely, which requires restarting the SIP and potentially losing momentum. If you need funds, a partial redemption from existing corpus is often better than stopping the SIP.

Sources: SIP calculator, AMFI India · AMFI India · SIP future value formula per standard financial mathematics (FV of annuity due)

All corpus figures are mathematical illustrations computed at the stated assumed CAGR. They are not projections of actual fund performance. Last verified: May 2026.