What a SIP return really means
A SIP (systematic investment plan) puts a fixed amount into a fund every month. Because each instalment is invested on a different date, each one grows for a different length of time. The first instalment compounds for the full term, and the last one for only a month.
That is why a SIP return cannot be worked out with the simple 'amount × rate × years' shortcut. You have to compound every instalment separately and add them up. The SIP formula does exactly that in one step.
The SIP maturity formula
Estimated value = P × [((1 + i)^n − 1) ÷ i] × (1 + i)
Here P is the monthly instalment, i is the monthly rate of return (the yearly rate divided by 12), and n is the number of monthly instalments. The final (1 + i) factor assumes each instalment is invested at the start of the month.
Worked example: ₹10,000 a month for 15 years
Assume an expected return of 12% a year. Then i = 12% ÷ 12 = 1% = 0.01, and n = 15 × 12 = 180 instalments.
(1.01)^180 is about 5.996. So the bracket becomes (5.996 − 1) ÷ 0.01 ≈ 499.6. Multiply by 10,000 and by 1.01 and you get an estimated value of about ₹50.5 lakh.
You invested 10,000 × 180 = ₹18 lakh, so roughly ₹32.5 lakh of the final value is growth. In other words, the money grows to about 2.8 times what you put in. You can check these numbers with the SIP Calculator.
Why starting early matters more than the amount
Compounding rewards time more than size. With the same assumptions, the first ₹10,000 instalment in this example grows for 15 years, while an instalment made in the last year grows for only a few months. Most of the final value comes from the later years of the plan, when the corpus is large and growth is applied to a bigger base.
If you delay a SIP by a few years, you usually have to raise the monthly amount a lot to reach the same target. Try the same inputs with a shorter duration to see the gap.
Limits of any SIP estimate
The return you enter is an assumption, not a promise. Equity-linked funds do not grow in a straight line, and some years will be negative. Expenses and taxes also reduce what you actually take home, and the formula above ignores both.
Use the result to compare plans and set targets, then review it every year. If you plan to raise your SIP as your income grows, the Step-up SIP Calculator shows the effect of that.
Frequently asked questions
Is the SIP formula the same as the compound interest formula?
It uses the same idea, compounding, but applies it to many instalments instead of one lump sum. Each instalment compounds for a different period, and the formula adds them together.
What return should I assume for a SIP?
Nobody can know in advance. Many people try a conservative, a moderate and an optimistic rate, such as 8%, 10% and 12%, to see a range instead of a single number.
Do SIP calculators include tax and fund expenses?
Most do not, and ours does not either. Treat the result as a pre-tax, pre-cost estimate.