The SIP (Systematic Investment Plan) formula calculates the maturity value of a series of fixed monthly investments compounding at a given rate of return. Unlike a lump sum, where one amount compounds for the full duration, a SIP formula has to account for every monthly instalment compounding for a different length of time, the first instalment grows for the whole period, the last one barely grows at all.
Formula
FV = P × [(1 + r)ⁿ − 1] / r × (1 + r)
| Variable | Meaning |
|---|---|
| FV | Future value, your maturity corpus |
| P | Fixed monthly investment amount |
| r | Monthly rate of return (annual rate ÷ 12 ÷ 100) |
| n | Total number of monthly instalments |
Worked Example
Investing ₹10,000 per month for 15 years (180 months) at an expected 12% annual return:
- Monthly rate: r = 12% ÷ 12 ÷ 100 = 0.01
- FV = 10,000 × [(1.01)¹⁸⁰ − 1] / 0.01 × 1.01 = ₹50,45,760
- Total invested: ₹10,000 × 180 = ₹18,00,000
- Wealth gained from compounding: ₹32,45,760
Notice that the gain (₹32.46 lakh) is nearly double the invested amount (₹18 lakh), that gap is entirely the effect of compounding over 15 years, not additional contributions.
Key Things to Know
- The formula assumes a constant monthly rate, but real mutual fund returns vary month to month. The final result is a smoothed projection, useful for planning but not a prediction of the exact final number.
- Small changes in duration matter more than small changes in the monthly amount at longer horizons, since compounding has more time to work, extending the same SIP from 15 to 20 years often adds more to the corpus than doubling the monthly amount for 15 years.
- XIRR, not this formula, is used to measure actual historical SIP returns once contributions have happened at different NAVs, this formula is for forward projection, not backward measurement.
- A Step-Up SIP formula is a variant that increases the monthly amount periodically rather than keeping P constant, compounding faster than the standard formula shown here.