You will be surprised to know how much small allocations can matter to you in the long run. To begin with wealth is a relative term and hard to define. But to understand the value of a SIP, you need to understand the power of compounding. Let us understand this with the help of an example. If you start a monthly SIP of Rs.5,000 for a 10 year period and expect to earn 12%, you will have a total corpus of Rs.11.5 lakh at the end of 10 years. If you earn 16% instead of 12% in the above example, your corpus at the end of 10 years increases to Rs.14.6 lakh. If you do an SIP of Rs.10,000 instead of Rs.5,000/- you will end up with Rs.29.3 lakh at the end of 10 years.

But the real clarity will come when you extend the time horizon to 20 years. If you do an Rs.5,000/- SIP for 20 years at 12% annual return you end up with Rs.49.5 lakh corpus at the end of 20 years. If you assume 16% annual return then you will end up with a corpus of Rs.86.3 lakh. Had you done an SIP of Rs.10,000/- instead of Rs.5,000, you will end up with a corpus of Rs.1.72 crore at the end of 20 years. This is how the power of compounding has a geometric effect on your wealth creation over longer periods of time. This may sound surprising but that is what the power of compounding is all about. The only condition is that you need to hold it for the long haul and not make any intermittent withdrawals. That will spoil your power of compounding.

Aastha Awasthianswered.You will be surprised to know how much small allocations can matter to you in the long run. To begin with wealth is a relative term and hard to define. But to understand the value of a SIP, you need to understand the power of compounding. Let us understand this with the help of an example. If you start a monthly SIP of Rs.5,000 for a 10 year period and expect to earn 12%, you will have a total corpus of Rs.11.5 lakh at the end of 10 years. If you earn 16% instead of 12% in the above example, your corpus at the end of 10 years increases to Rs.14.6 lakh. If you do an SIP of Rs.10,000 instead of Rs.5,000/- you will end up with Rs.29.3 lakh at the end of 10 years.

But the real clarity will come when you extend the time horizon to 20 years. If you do an Rs.5,000/- SIP for 20 years at 12% annual return you end up with Rs.49.5 lakh corpus at the end of 20 years. If you assume 16% annual return then you will end up with a corpus of Rs.86.3 lakh. Had you done an SIP of Rs.10,000/- instead of Rs.5,000, you will end up with a corpus of Rs.1.72 crore at the end of 20 years. This is how the power of compounding has a geometric effect on your wealth creation over longer periods of time. This may sound surprising but that is what the power of compounding is all about. The only condition is that you need to hold it for the long haul and not make any intermittent withdrawals. That will spoil your power of compounding.