From Struggling For First Rs 1 Crore To Adding A Crore Every Year: The Magic Of SIP Compounding

If you are a mutual fund investor and you believe building Rs 1 crore out of a total required corpus of Rs 10 crore is only 10 per cent of the process, then you are mistaken. Once an investor reaches the first 1 crore, he has sailed through the toughest and the slowest part of the journey to a 10 crore corpus already. How? What does it mean for investors?

If someone invests Rs 30,000 per month via a systematic investment plan (SIP) in mutual funds, assuming a 12 per cent rate of return, it would take them 12.5 to 13 years to reach their first Rs 1 crore corpus.

But to add the second Rs 1 crore, that is to reach a total corpus of Rs 2 crore, he would not have to wait that long. He would be able to add the next Rs 1 crore in another five years. And the third 1 crore that is to reach a total corpus of Rs 3 crore, it would take him just three extra years and so on. Once the investor reaches his corpus of 6 crore, after 27 years, it would take him just about one additional year to add every extra Rs 1 crore to the mutual fund kitty.

This explains the magic of compounding. When you invest in mutual funds via SIP, initially, it may seem like a slow process, but after a few years, compounding shows its true magic. Not only the principal amount but returns accumulated in all those years also start to earn returns, which amplifies the process of building wealth.

8-4-3 Rule of SIP in Mutual Fund

Funds India performed a similar study to show how initially, SIPs seem like they barely move in the initial years of investment as you begin from scratch, but once you have been there for some years, the compounding plays its role and suddenly, your wealth begins to multiply much faster.

The report uses the 8-4-3 rule to explain how the whole wealth-building process through SIPs works. It assumes an investor investing Rs. 30,000 every month @ 12% per annum returns.

Based on the above assumption, it explains the Rule of 8-4-3 as follows:

• 8: It takes painfully long, approx. 8 years to reach your first Rs 50 lakh,

• 4: but it takes only half the time (approx. 4 years) for the second Rs 50 lakh,

• 3: It takes only three years to get the third Rs 50 lakh.

And, by the time an investor reaches the 20th year, he adds Rs 50 lakh almost every year.

Similarly, if an investor invests Rs 50,000 every month @ 12 per cent returns, it would take around 8 years to reach the first Rs 80 lakh; but only four years for the second Rs 80 lakh and only three years for the third Rs 80 lakh.  And after 20 years, the investor would be able to add Rs 80 lakh to total wealth almost every year, shows the study by Funds India.

To sum up, if you are a new investor, you should trust the process. Invest as per your income levels and don’t get demotivated midway. The initial phase truly tests your patience and discipline. But once you cross that first major milestone, your wealth starts to grow exponentially.