SIP explained: how monthly investing compounds
A SIP — Systematic Investment Plan — just means putting a fixed amount into an investment every month instead of a lump sum all at once. The interesting part is how that steady habit compounds. Here's the mechanism, the formula, and a worked example.
Why monthly investing works
Each monthly contribution starts earning returns from the moment it goes in, and those returns themselves earn returns — that's compounding. The money you invest in year one compounds for the whole period; the money you invest in the final year compounds for only a few months. So an early instalment does far more lifting than a late one, and the total grows faster than the simple sum of what you put in. Spreading purchases across months also means you buy at many different prices rather than betting everything on one day's price.
The future-value formula
For a fixed amount invested at the start of each month, the value at the end is:
where:
- P = the amount invested each month.
- i = the assumed monthly rate of return as a decimal — the annual rate divided by 12 and by 100. An expected 12% a year gives i = 0.01.
- n = the number of monthly instalments.
The bracketed part is the future value of a series of ₹1 payments; multiplying by P scales it to your actual instalment. The final ×(1 + i) is there because each contribution is made at the start of the month, so it earns one extra period of growth.
A worked example: ₹10,000 a month for 10 years
Invest ₹10,000 every month for 10 years, assuming a 12% annual return.
| Quantity | Value |
|---|---|
| Monthly investment, P | ₹10,000 |
| Monthly rate, i | 12 ÷ 12 ÷ 100 = 0.01 |
| Months, n | 120 |
| (1 + i)n = 1.01120 | ≈ 3.300 |
= 10000 × 230.0 × 1.01
≈ ₹23,20,000
You contributed ₹10,000 × 120 = ₹12,00,000 over the ten years. The remaining ~₹11,20,000 is growth. More than half the final amount is money you never deposited — that's compounding doing the work.
What changes the outcome
- Time is the biggest lever. Running the same ₹10,000 SIP for 20 years instead of 10 doesn't double the result — it roughly quadruples it, because the early instalments compound for far longer.
- The assumed return matters, and it's only an assumption. Market returns vary year to year; the formula uses a single steady rate to illustrate, not to promise.
- Raising the monthly amount scales the result proportionally for the same rate and duration.
You can try your own numbers — any amount, rate, and duration, plus lump-sum and goal-based variants — in Northcell's EMI Calculator, fully offline.