SIP Returns: Identical SIP investments, yet a difference of ₹2.85 crore! Understand the crucial role of 'timing of returns' in mutual funds..

Same SIP, Different Returns: New investors starting a Systematic Investment Plan (SIP) in mutual funds often wonder, "Is my SIP actually working?" During the initial two or three years of investment, market fluctuations mean there is no visible "magical" growth in the portfolio. Consequently, people often assume that the concept of compounding exists only on paper.

If you think this way, you are mistaken. The early years of an SIP are not about wealth accumulation but about building a solid foundation. Let us understand this through an interesting example—incorporating insights from Niranjan Avasthi, Head at Edelweiss Asset Management—showing how two individuals investing the same amount can end up with a massive difference of ₹2.85 crore in their returns.

Let’s consider two investors, A and B. Both invest ₹50,000 per month via SIP for a full 20 years. While their total investment is identical, the timing of the market returns they receive differs:

Investor A (Bumper returns early on): Receives an annual return of 24% during the first 5 years and 12% during the final 15 years.

Investor B (Bumper returns in later years): The scenario is the exact opposite. Receives a 12% annual return for the first 15 years but earns a robust 24% annual return during the final 5 years.

A Surprising Outcome

At the end of the 20 years, Investor B’s total corpus grows to ₹8.77 crore, whereas Investor A’s fund stands at only ₹5.92 crore. Although both invested the same monthly amount, the difference in the timing of returns resulted in a massive gap of ₹2.85 crore between them.

Even if the SIP amount were smaller—say, ₹10,000 per month—the investor receiving higher returns in the later years would still have earned approximately ₹57 lakh more.

Why does this happen?

People generally assume that earning higher returns early on gives money more time to grow, implying the fund should become larger. While this may hold for lump-sum investments, the rule for SIPs is different.

When you start an SIP, your accumulated fund is quite small during the initial years. Even if the market surges at a rate of 24% during that time, that growth applies only to a small corpus.

After investing consistently for 15 years, your fund grows significantly. When this large corpus earns a 24% return in the final years, the absolute profit in monetary terms is massive.

Commenting on this, Niranjan Avasthi said, "The early years are not about getting rich; they are about accumulating mutual fund units at varying price points and building a solid foundation. True wealth creation happens later. Patience in investing is not a burden; it is its greatest virtue."

Where do investors go wrong with long-term SIPs?

The biggest mistake is evaluating long-term SIPs too early—often within just 2 or 3 years. Initially, most of your installments have only recently entered the market, so the magic of compounding isn't immediately visible on your screen. As time passes, the returns generated on your older units propel your fund's growth like a rocket.

Should we hope for poor returns at the start?

Absolutely not; the point of this example isn't to suggest that a poor-performing market at the start is beneficial. No one can control market movements—when it rises or falls. The key takeaway is that a slow start over the first 2–3 years does not mean your investment strategy has failed.

In short, if your SIP has been running for only 2 or 3 years and the returns appear modest, do not lose faith. This phase is simply about staying invested with discipline and accumulating as many units as possible. Compounding works from day one, but its true and significant impact becomes visible only when you have built a substantial investment base.

Disclaimer: This content has been sourced and edited from Money Control. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.