How SIP Returns Are Calculated

This is the idea that makes everything else about SIPs make sense. Your first instalment compounds for the entire period. Your last instalment compounds for one month. Every instalment in between compounds for its own length of time.

Summing all of those individual growths gives the standard SIP formula: FV = P × ((1+i)ⁿ − 1) ÷ i × (1+i), where P is the instalment, i is the monthly return and n is the number of instalments. The final × (1+i) reflects investing at the start of each month, which is the convention every mainstream Indian SIP calculator uses.

On a ₹10,000 monthly SIP at an assumed 12%, the value roughly doubles between year fifteen and year twenty while the amount invested rises by only a third.

The reason is simply that the same percentage return produces far more rupees on a large corpus than on a small one. This is why stopping a SIP a few years early costs disproportionately more than starting it a few years late — you lose the years when the compounding is doing most of its work.

A twenty-year SIP that turns ₹24 lakh into ₹1 crore has an absolute return of about 316%. That number is impressive and almost meaningless, because it says nothing about how long it took.

The right measure for a series of investments made at different times is XIRR — the internal rate of return that accounts for the timing of each cash flow. It is what fund houses report and what you should compare across options.

Confusing the two is how people conclude that an investment "gave 300% returns" when the annualised figure was around 12%.

• Time, more than anything else. Starting five years earlier beats contributing 20% more.
• The step-up. Raising the instalment each year in line with income compounds those increases for the remaining years.
• Not stopping. Missed instalments during market falls are the most expensive ones to miss, because they were buying at lower prices.
• Costs. A higher expense ratio quietly removes a meaningful share of the final corpus over twenty years.
• The assumed return. It is the input you control least and the one that moves the answer most — which is a reason to plan on a conservative figure.