What Is a SIP and How Are Returns Calculated?
A Systematic Investment Plan (SIP) lets you invest a fixed amount in a mutual fund every month instead of making a large lump-sum investment. Because you buy fund units at different prices each month, you benefit from rupee-cost averaging — buying more units when prices fall and fewer when they rise. Over long periods, this smooths out market volatility and compounds wealth significantly.
SIP Future Value Formula
The future value of a SIP is calculated using the annuity formula:
FV = PMT × [((1 + r)^n − 1) ÷ r] × (1 + r)
Where PMT is the monthly investment, r is the monthly return rate (annual rate ÷ 12 ÷ 100), and n is the total number of months invested. The final × (1 + r) accounts for beginning-of-month investment.
Worked Example
You invest ₹5,000 every month in an equity mutual fund for 15 years, expecting a 12% annual return.
- Monthly rate r = 12 ÷ 12 ÷ 100 = 0.01
- n = 15 × 12 = 180 months
- Total invested = ₹5,000 × 180 = ₹9,00,000
- Estimated corpus at maturity = ₹25,22,880
- Returns earned through compounding = ₹16,22,880
The power of SIP is that ₹9 lakh invested becomes ₹25 lakh — nearly 2.8× — purely through compounding. Starting early amplifies this effect dramatically; the same SIP over 25 years would grow to over ₹95 lakh.