How SIP returns
are calculated

What a SIP is, and why it compounds

A systematic investment plan (SIP) invests a fixed amount at regular intervals, usually every month, into a mutual fund. Each instalment is invested separately, so each one grows for a different length of time: the first for the whole period, the last for a single month.

Compounding means returns earn returns of their own. A projection simply assumes the same return every month, which is how a calculator can turn three inputs into one figure.

A fixed amount also buys more units when prices are low and fewer when they are high, so the average cost per unit can end up below the average price. This is often called rupee-cost averaging. It smooths your entry points, but it does not remove risk or guarantee a profit.

The SIP formula

The part in square brackets adds up the compounded value of every instalment. The last factor, (1 + i), moves each one a month earlier, because the money goes in at the start of the month.

To get i, divide the annual rate by 12 and then by 100. Dividing 12% by 12 gives 1% a month, which compounds to an effective 12.68% over a full year. Some tools instead convert 12% a year to its exact monthly equivalent, about 0.949%, and show a lower result: ₹11,20,179 for the example below. Check which method a calculator uses before comparing figures.

Worked example: ₹5,000 a month at 12% for 10 years

About 48% of the final amount is growth and the rest is your own money. All figures are rounded to the nearest rupee.

How the period changes the outcome

Going from 10 to 20 years doubles the money you put in but multiplies the projected value by about 4.3, because the earliest instalments compound for longer. Starting five years later and stopping on the same date leaves 15 years: ₹25,22,880 instead of ₹49,95,740. The rate matters too. At 8% instead of 12%, the 10-year projection falls to ₹9,20,828.

Growth also builds on itself. After 5 years the gain is about 37% of what you invested; after 20 years it is about 316%.

Raising the SIP to ₹6,000 lifts the 10-year projection to ₹13,94,034, about ₹2.3 lakh more. Extending the ₹5,000 SIP by five years lifts it to ₹25,22,880, about ₹13.6 lakh more. In this projection, time does more work than a small increase in the amount.

Returns are not guaranteed

The 12% above is an illustration, not a forecast or a promise. SIPs in market-linked funds can lose value, and real returns change from month to month. A projection draws a straight line; real markets rise and fall, and the same average return can feel very different depending on when you start and stop. Mutual fund investments are subject to market risks.

The formula also leaves out several things that reduce what you actually keep:

• Fund charges, such as the expense ratio and any exit load.
• Taxes on gains.
• Inflation, so the buying power of the final amount will be lower than the headline figure.
• Missed or paused instalments.

SIP vs lump sum, and how to check returns

A lump sum goes in all at once. If ₹6,00,000 were invested on day one and grew at the same 1% a month for 120 months, it would reach ₹19,80,232, against ₹11,61,695 for the SIP, because all of the money works for the whole period. But few people have ₹6,00,000 on day one. A SIP invests from regular income and spreads your purchases across different market levels, while a lump sum depends on a single entry date.

To judge a finished SIP, do not run the CAGR Calculator on total invested against final value. That treats all ₹6,00,000 as if it went in on day one and gives only about 6.8%, far below the 12% assumed. The ROI Calculator gives the total gain instead: (11,61,695 − 6,00,000) ÷ 6,00,000 = 93.6%, which does not account for time.