SIP Returns Explained: How a Monthly Investment Grows
What a SIP is, the formula behind a SIP calculator, a worked example with real figures, and why the result is an estimate and never a promise.
In this article
A SIP, short for systematic investment plan, is a way of putting money into a mutual fund a little at a time instead of all at once. This guide explains what a SIP is, the formula behind the estimate a SIP calculator gives you, a worked example with real numbers, and why that estimate is never a promise.
What a SIP actually is
The SEBI investor FAQ describes it simply: a SIP allows an investor to invest regularly, putting a small amount into a mutual fund every month. AMFI-branded material published by Outlook India adds that the instalment could be as little as ₹500 a month, that you give your bank a standing instruction or ECS mandate to debit the amount each month, and that a SIP is similar to a recurring deposit.
The comparison with a recurring deposit has a limit, and it matters. A recurring deposit pays a stated rate. A SIP buys units of a mutual fund, and the value of those units moves with the market. The same AMFI-branded page says SIP investments are subject to market volatility and risks.
The formula behind the estimate
A calculator cannot know what the market will do, so it asks you to assume a return and works out what would happen if that return were earned steadily. The usual formula is:
FV = P × ((1 + i)^n − 1) / i × (1 + i)- FV is the estimated value at the end.
- P is the amount you invest each month.
- i is the monthly rate: the yearly return divided by 12, then by 100. A 12% yearly return gives i = 0.01.
- n is the number of months. Ten years gives n = 120.
The last part, × (1 + i), assumes each instalment goes in at the start of the month, so it earns that month's return too. Some calculators assume the end of the month instead, which gives a slightly lower answer. That is why two calculators can disagree by a small amount without either being wrong. Our SIP calculator uses the start-of-month version and says so on the page.
A worked example
Say you invest ₹5,000 a month for 10 years and assume a 12% yearly return. You put in ₹6,00,000 over the 120 months. The formula gives an estimated value of about ₹11,61,695, so the estimated gain is about ₹5,61,695.
Now change only the assumed return. At 8% a year the same plan gives about ₹9,20,828, a gain of about ₹3,20,828. At 0% it gives back exactly what you put in, ₹6,00,000. Nothing else changed: the same money, the same ten years, a very different result. This is the most useful thing a calculator teaches. The answer depends heavily on a number nobody knows in advance.
Why time matters more than the amount
Keep the 12% assumption and the ₹5,000 a month, and stretch the plan to 20 years. You invest ₹12,00,000, double the money, but the estimate is about ₹49,95,740, more than four times as much. The reason is that the early instalments have longer to earn, and what they earn also earns. Try it yourself in the calculator and change the years first, then the amount.
How a SIP spreads out your buying price
The SEBI FAQ gives a small example. An investor puts in ₹1,000 every month for a year, and the fund's price per unit moves around between 9 and 11.5. In the months when the price is low, the same ₹1,000 buys more units, and when it is high it buys fewer. Over the year the investor ends up with about 1,186 units at an average cost of roughly ₹10.12 per unit.
The same FAQ shows that a single lump sum on one particular day would have bought between about 1,043 and 1,333 units depending on the day chosen, or exactly 1,000 units on 1 January. Note what this does and does not say. It shows how regular buying averages out the price in that one made-up year. It does not say a SIP always beats a lump sum. If prices only rise, the money invested first would have done better.
What the calculator cannot tell you
- The future return. The SEBI investor site says plainly that investing involves potential risks and that there are no guaranteed returns.
- How a particular fund will do. SEBI notes that past performance can provide insights but does not guarantee returns.
- Costs and taxes. Fund charges and tax on gains are not in the formula, so your real result will usually be lower than the estimate.
- Changes along the way. A real SIP may be stopped, paused or increased, and the calculator assumes none of that.
Common mistakes
- Using a hopeful return. Entering 15% or 18% because a fund did that last year makes the estimate look better, not more accurate. Try a lower number and see whether the plan still works for you.
- Forgetting the goal. Work backwards from what you need and when, then see what monthly amount would be needed under a cautious assumption.
- Comparing a SIP result with a lump sum result as if the money were the same. A SIP puts money in over time, so each rupee has a different amount of time to grow.
How to use the estimate
Treat it as a way to compare plans and to feel how time and return change the outcome, not as a forecast. Run it with a low, a middle and a high return and plan around the low one. Before choosing a fund, read the scheme's offer document, as the SEBI FAQ advises.
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