Power of Compounding
Last Updated: 01 October, 2025
6 min read
00:00 / 00:00
When it comes to investing, mutual funds stand out. With so many options and combinations, finding a fund that suits the risk and return becomes really simple. At the same time, there is an option to invest in lumpsum or SIP. This allows every investor to start the investment journey easily.
But do you know that there is a concept called the power of compounding, which is associated with the SIP? This is the reason that allows you to gain exponential growth on your investment in no time. But what is this exactly, and how does this work?
Well, if you are eager to understand the power of compounding in mutual funds, read this guide. Know all the details you need.
What is the Power of Compounding in Mutual Funds?
The power of compounding in mutual fund investing refers to a process where your returns are reinvested to generate further earnings. In simple words, your money earns returns, and then even those returns are invested to help you earn higher returns.
This is a simple method that helps you grow your funds rapidly. When this process goes on consistently, you will experience what is known as the snowball effect. In other words, the more stable you are in your investing, the higher your compounding income.
While this might sound like a typical calculation, you can easily use the SIP calculator for ease. To understand this better, let us explore the simple compounding in stock market examples.
Example of Power of Compounding in SIP
Suppose you invest Rs. 1,000 every month in a SIP. Now you plan to keep investing in it for the next 5 years. The expected annual return rate is 10%. So, in the tenure of 5 years, you will be investing a total of Rs. 60,000.
Now, let the compounding work for you. So, now, you will see that your investment grows to Rs. 78,082, giving you Rs. 18,082 as returns.
To understand this better, here is a simple table for analysis:
Month | Investment Made (Rs.) | Value at That Time (Rs.) | Notes |
1 | 1,000 | 1,008.00 | First installment starts compounding |
2 | 1,000 | 2,018.00 | First + second installment growing |
3 | 1,000 | 3,041.00 | Returns begin to add up |
4 | 1,000 | 4,076.00 | Compounding effect visible |
5 | 1,000 | 5,123.00 | Growth continues |
6 | 1,000 | 6,183 | Each past SIP keeps compounding |
… | … | … | … |
59 | 1,000 | 76,264 | Near maturity |
60 | 1,000 | 78,082 | Final value after 5 years |
Now, to get to this future value of SIP, the formula that is used is as follows:
FV = P × ({[1 + r]^n - 1} / r) × (1 + r)
Where,
FV is the future value of investment upon maturity.
P is the amount invested at regular intervals.
n is the number of payments done.
r is the expected rate of return.
Benefits of Power of Compounding in SIP
The real strength of the SIP is in the way the money is invested. The amount you invest every month slowly accumulates and helps you gain better returns over time. This might not be visible in the initial months, but eventually you will be able to see the returns. But there is more to it.
So, here are the key benefits that you should know of:
1. Wealth Creation from Modest Investments
One of the biggest advantages is that you do not need a huge amount to start. This can be started with something as low as Rs. 500, and eventually, you will be able to see the amount grow. The main reason behind this wealth creation is that every return you gain is again invested in the next month, allowing you to earn more.
2. Promotes Financial Discipline
When you plan to start SIP for short-term or long-term, you will gain returns at the end. But the other benefit that you will gain is the habit of regular investing. Since there will be only investments involved, this will help you gain financial discipline, which will be really helpful in the long run.
3. Power of Time
Compounding rewards patience. The longer you stay invested, the larger the growth. For example, a 10-year SIP may double your money. But now, if you go ahead with the 20-year, you might get the funds multiplied 3-4 times or more. So, the more the year you invest, the better the return.
4. Helps Beat Inflation
There are various types of SIP investments that you can go ahead with. But each of these will help you beat inflation greatly. With the power of compounding in a mutual fund. Your money grows faster than inflation rates. This will ensure that your returns grow over time and you can increase your investment value as well.
5. Reduces Stress of Market Timing
It is hard to find the right day for investment. In fact, you are actually investing the right amount every month so that you can manage the ups and downs and still earn a good return. This makes investing less stressful. Also, you can now be assured of higher returns over time.
Tips to Get a Better Compounding Effect in SIP
When you are looking to explore the power of compounding for SIPs, you must follow the tips below to get the maximum benefit:
Start your investment journey early.
Ensure that you invest for the long run.
Increase your SIP amount with a step-up SIP for better returns.
Ensure to invest the dividends as well, if any.
Maintain the needed consistency.
Invest in the funds that grow over time.
Conclusion
The power of compounding in SIP is really impactful. It not only helps you to create wealth but also ensures that your fund stays safe. Also, when you are investing in SIP, you are freed from the worry of managing time or checking the stocks regularly.
This financial commitment and discipline will help you earn better returns. So, are you ready to start your SIP journey?
Well, connect with the experts at Rupeezy and let the power of compounding work for your future.
FAQs
1. Is compounding guaranteed in SIPs?
No, compounding depends on the fund’s performance. There are chances that a few funds might offer you greater returns as compared to the rest.
2. Do SIPs in debt funds also compound?
Yes, SIPs in both equity and debt funds compound. The ones in the equity compound faster as compared to the other. Also, long-term investment plays an important role.
3. What happens if I stop my SIP midway?
There will be no impact on your investment. Your invested amount will continue to grow. But there will be no addition to new wealth creation.
4. Can I change my SIP amount later?
Yes, many funds offer step-up SIPs. But if not, you can start a new SIP and ensure that you earn better returns on your investment.
5. Is tax deducted on compounding gains?
Yes. There is tax deducted on the compounding gains. It will depend on the tenure, the amount you withdraw, and the type of fund.
The content on this blog is for educational purposes only and should not be considered investment advice. While we strive for accuracy, some information may contain errors or delays in updates.
Mentions of stocks or investment products are solely for informational purposes and do not constitute recommendations. Investors should conduct their own research before making any decisions.
Investing in financial markets are subject to market risks, and past performance does not guarantee future results. It is advisable to consult a qualified financial professional, review official documents, and verify information independently before making investment decisions.
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