How SIP Returns are Estimated: The Compounding Formula
Learn the mathematics behind Systematic Investment Plans (SIP) and how monthly compounding generates wealth over time.
Capital Markets & Portfolio Analytics Specialists
The Mathematics of SIP
A Systematic Investment Plan (SIP) involves investing a fixed sum of money at regular intervals. Because each monthly deposit earns interest for a different length of time, standard compound interest formulas do not directly apply. Instead, SIP calculators use the Future Value of an Annuity formula.
The SIP Formula
FV = P × [((1 + r)^n - 1) / r] × (1 + r)
Where:
- FV = Future Value (Maturity Amount)
- P = Periodic investment amount (Monthly SIP)
- r = Periodic interest rate (Annual Expected Return / 12 / 100)
- n = Total number of investments (Months)
Note: The trailing (1 + r) accounts for investments being made at the beginning of the month.
Why are these only "Estimates"?
Unlike a fixed deposit where the interest rate is guaranteed by a bank, SIPs are typically investments into market-linked mutual funds. The stock market does not deliver a linear, fixed return every month. The "Expected Annual Return" used in SIP calculations is merely a mathematically smoothed assumption for planning purposes.
Project Wealth Creation Online
To experiment with various monthly contribution levels and expected returns over 5 to 30 years, use our interactive free SIP Calculator or calculate lump-sum growth with the Compound Interest Calculator.