What is a SIP?
A Systematic Investment Plan (SIP) is a disciplined method of investing a fixed sum in a mutual fund at regular intervals: typically monthly. Instead of trying to time the market by investing a lump sum at the "right" moment, SIP spreads your investments over time, automatically buying more units when prices are low and fewer units when prices are high. This is called rupee-cost averaging.
The mechanical simplicity of SIP: set it and forget it: is its biggest strength. You don't need to monitor the market. You don't need to decide when to invest. The compounding engine runs in the background every month.
The SIP formula
The future value of a SIP is calculated using the future value of an ordinary annuity:
FV = P × ((1+r)^n − 1) / r × (1+r)
Where:
- P = monthly investment amount
- r = monthly interest rate (annual rate ÷ 12 ÷ 100)
- n = total number of months
The × (1+r) at the end adjusts for the fact that each payment earns one extra month of returns: the SIP payment at the beginning of the first month earns interest for the full tenure.
Why CAGR is lower than the input rate
The CAGR shown in the calculator is the effective annual return on your total invested capital: not the annual return assumption you entered. These are different numbers because in a SIP, your money is deployed gradually, not all on day one.
If you invest ₹5,000/month at 12% p.a. for 10 years, your total invested capital is ₹6L. But the first ₹5,000 earns 12% for 10 years while the last ₹5,000 earns 12% for one month. The effective return on the total ₹6L invested is roughly 9–10% CAGR: lower than the 12% assumed fund return.
This is not a loss. It simply reflects the gradual capital deployment. The absolute corpus is exactly what the 12% assumption produces.
The power of time: compounding after year 5
The year-by-year chart reveals a critical insight: the growth acceleration is non-linear. In the early years, your corpus grows mostly because you're adding new money. After year 5–7, the returns on existing corpus start to exceed your new monthly contributions. After year 10+, the corpus grows dramatically on its own momentum.
This is why SIP advisors always say "start early and stay long." A ₹5,000/month SIP started at 25 produces roughly 2.5× the corpus at 60 compared to starting at 35: with only 10 extra years of contributions.
What return rate should you assume?
The 12% default is the most commonly cited long-term equity mutual fund average in India:
- Large-cap equity funds: 10–12% (10-year rolling average, historical)
- Mid-cap equity funds: 12–15% (higher variance: some years much higher, some much lower)
- Balanced/hybrid funds: 8–10%
- Debt funds: 6–8%
- Post office / bank FD: 6–7.5%
The 12% rate is reasonable for a well-chosen diversified equity fund over a 10+ year horizon. For shorter tenures (3–5 years), use a more conservative 8–10% to account for sequence-of-returns risk.
Inflation-adjusted returns
The nominal corpus shown is not inflation-adjusted. To estimate the real purchasing power of your corpus at maturity, apply the real return rate:
Real rate ≈ (Nominal rate − Inflation rate)
At 12% nominal and 6% inflation, the real rate is approximately 5.7% (Exact: (1.12/1.06) - 1 = 5.66%). This is the rate that matters for comparing today's purchasing power to future purchasing power.
Tax treatment of SIP gains
In India, equity mutual fund SIP gains are subject to capital gains tax:
- Short-term (< 1 year): 20%
- Long-term (≥ 1 year, gains > ₹1.25L/year): 12.5%
Each SIP installment is treated as a separate investment with its own purchase date. When you redeem units, the oldest units are redeemed first (FIFO). Long-term capital gains on equity funds are tax-efficient compared to fixed deposits, where interest is taxed at your income slab rate.