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Power of Compounding in Systematic Investment Plan (SIP)

Article · December 2023

DOI: 10.37896/jxu16.8/028

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

Power of Compounding in Systematic Investment Plan

(SIP)
Mr. Ajay Kumar
Assistant Professor UCCM
Ashok Kumar
Constable, Himachal Pradesh Police (HPP)
Guru Kashi University, Talwandi Sabo (Bathinda)
Abstract: There is an eighth wonder of the world is Rule of Compounding. Compounding
is the process whereby interest is credited to an existing principal amount as well as to
interest already paid. Compounding thus can be construed as interest on interest—the effect
of which is to magnify returns to interest over time, the so-called “miracle of compounding.”
When the principal includes the accumulated interest of the previous periods and interest is
calculated on this then they say its compound interest. In this paper the author tried to find
out the power of compounding in mutual fund selection by investing in good performing
funds among equity types of Mutual Funds SIP fund-based performance in different Mutual
Fund Asset Management Companies (AMC). The aim of this paper is to focuses on tentative
assumptions in that the Systematic Investment Plan investing in mutual fund schemes by
debiting a fixed amount from the bank account every month or quarter. It helps to invest
money gradually. In this paper author was choose five reputed Mutual Funds companies and
tried to find out last three year SIP returns with the help of Groww Application, Money
Control, AMFI and SEBI websit.
Keyword: Compounding, interest, Mutual Funds, SIP, AMC, Groww.
Introduction
Mutual fund is the pool of the money, based on the trust who invested the savings of a
number of shareholders who shares on common financial goal, life the capital appreciation
and dividend earning. They money invested by capital market such as shares, bonds,
debenture and foreign markets. Shareholders invest money and get the units as per the unit’s
value which we called as NAV (Net Assets Value).
Prospective investors can think that SIP and Mutual Funds are the same. However, SIPs
simply a method of investing Mutual Funds, the other method being a huge. A SIP calculator
is a tool that helps you determine the returns you are able to avail when parking your funds
such investment tools. Systematic Investment Plan is a process of investing a set amount of
money in mutual funds at regular intervals. SIPs usually get you to invest weekly, quarterly
or monthly.
Your investments should also be in line with your changing financial situation, so if your
income/salary increases, so when your investments to keep up with the changing lifestyle
costs. SIPs can be customized, increased, stopped in case of an emergency or started on any
date you need. So, improve the potency of economical (financial) planning with SIPs and
plan right for your financial goals in life. Start SIP today.

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

1. Retirement Planning
2. Plan for Dream House
SIP (Systematic Investment Plan) - is one of the most disciplined approach to investments
in mutual funds. It lets you set aside a fixed sum of money at regular intervals (weekly,
monthly, and quarterly) with an objective to generate capital appreciation in the longer
run. SIP investment inculcates the habit of savings; the best way to save regularly without
fail is to make your Salary Day as your SIP date.

Power of Compounding Calculator: SIPs are a more lucrative mode of investing funds
compared to a lump sum amount according to several mutual fund experts. It helps you
become financially disciplined and create a habit of savings that can benefit you in the future.
A SIP calculator online is a beneficial tool, which shows the estimated returns you will earn
after the investment tenure. Few of the benefits of SIP calculator includes:

- Assist you to determine the amount you want to invest in.

- Tells you the total amount you have invested.
- Gives an estimated value of the return.

How do SIP Calculators work?

A SIP plan calculator works on the following formula:-

M = P × ({[1 + i] ^ {n} - 1} / i) × (1 + i).

Where,

 M is the amount you receive upon maturity.

 P is the amount you invest at regular intervals.
 n is the number of payments you have made.
 i is the periodic rate of interest.

Review of Literature

K. Alamelu and G.Indhumathi (2017): This study focuses on Hypothetical assumption in

that the Systematic Investment Plan is the best way to build up capital over a period of time
for those who don’t have lump sum amount to invest as the risk will be reduced in to
investing in term equity based mutual fund SIP. The author wants to make aware about the
volatility of returns in mutual funds can be statistically calculated with the help of benchmark
of all kinds of funds. The author found that long term returns of large cap equity fund
schemes are

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

comparatively less than small & mid cap Tax Saving Funds schemes & equity sector fund
schemes. At the end author was make aware with important factor i.e. risk. Author found that
larger cap equity fund have low risk as compare to mid cap and small cap equity growth
funds.

Ishika Mittal (November, 2021): in power of compounding in Mutual fund Ishika Mittal
stated that reinvestment of earning at the same rate of return to grow the principal amount
every year is compounding. Compounding interest can be used to buy investment to plan
their financial goals. It can be calculated daily, monthly, quarterly, half yearly and yearly too.
The author further stated that compounding is also done on loan, deposits and investments.

The compounding formula used the power of compounding as per following equation: P
[((1+i^n)-1]. The author has further Clearfield to compounding used on various calculating
examples and states that it randomly increase the principal amount every year and earn
interest on interest. Compounding interest makes investment money grow faster and long
term investment will be potential to earn higher volume.
Dr. Chandrakala V and Dr. S Oviya (October 2017): the financial market are
progressively more optimistic methods to the traders who are attempting to propagate their
savings through different method of investment most of the money is in a bank account. The
author told investing is a thing that many people would not have time to knowledge to
complete. Mutual funds are a favourite way to obtain. Author want to make aware very
important part i.e. many investors raise a common question before investing in Mutual Funds
that weather to spend to lump-sum. This kind of study compares investment programs, its
return as well as performance of the schemes.
S.srimaan Ramachandra raja and Sohail Hirani (January 2019): Through Systematic
Investment Plan (SIP) has happen at alternative investment policy for many investors
considering high return but less risk with purchases of instalments. The intent of the study is
to discover the motivating factor to invest in systematic investment plan and the issue is the
scheme. Author further clarified that data have been compiled from secondary sources.
Author found that SIP is better option for retail investors but for long term capital
appreciation. Retail investors can make his or her investment in fairness fund through the
monthly or quarterly of in multiple of 500, 1000, 1500, and 2000. Modest investors can enjoy
the movements by committing regularly.
Debalina Roy and Koushik Ghosh (2011): Author told within our work we have studied
how the investment in mutual funds through Systematic Investment Plan (SIP) can
boost the
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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

proportion of income in mutual fund. Author further classified SIP with the help of some
schemes they said investigations are also performed to find out what percentage of bank
customers invest in mutual funds especially through SIP with specific reference to HDFC
Bank, Shyambazar Branch, Kolkata, India. Author make a survey work for the present
analysis has been done taking the population as the customers of the HDFC Bank,
Shyambazar Branch, and Kolkata, India. Hence naturally the target market was Kolkata
region mainly the North Kolkata.

Objectives of the Study

1. To identify the power of computing in long term Investment.
2. To evaluate and compare the long term performances of selected mutual funds
through SIP.
3. To find out the why investors said risk minimized in long term performance Mutual
Fund (SIP).
4. To know the return in Systematic Investment Plan (SIP).

Research Methodology

Sample: SIP is very useful tool of Mutual to achieve our goals in long term, in other
works SIP in goal oriented. To identify the performance of SIP, the author data taken last
three years information which is related to Net Asset Value of different types of a
schemes from different categories

In the paper researcher covers time duration of last four years from January, 2019 to
December, 2021.

Source of Data: The information is required for to make this paper effective are collected
through Groww, and AMFI. The data i have put in tables is first hand data also best in my
favour.

- NAV: it stands for Net Asset Value. In simple words, NAV can be defined as the
market value per unit of securities held by the scheme. It is calculated by the AMC at
the end of every business day. It is varies from day to day.
- Units: Units represent your holding in a mutual fund scheme and are the smallest
portion of its ownership. Sometimes, they are also referred to as shares. Mutual fund
units are issued by fund companies according to the amount of money invested by
investors.

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

- Simple interest is a quick and easy method of calculating the interest charge on a
loan. Simple interest is determined by multiplying the daily interest rate by the
principal by the number of days that elapse between payments. SI is fixed throughout
the Investment
- Compound interest is interest earned from the original principal plus accumulated
interest. There is an eighth wonder of the world is Rule of Compounding Interest.
Think about compound interest a bit like what happens when the "snowball effect"
occurs. A snowball starts small, but the more snow that's added, the bigger it gets. As
it grows, it becomes bigger at a faster rate.

Analysis of Selected Company’s Systematic Investment Plan (SIP) under Mutual

Fund Table 1
Axis Small Cap Fund Direct Growth

No. of Simple Interest Simple Interest

Deposits Units Amount Profit Profit %
Years Profit % Amount

Year 1 24000 789.4332582 27606.48 3606.481 15.027 15.027 27606

Year 2 48000 1509.335276 66561.69 18561.69 38.67018 15.027 55200
Year 3 72000 1941.41127 137354.8 65354.85 90.77062 15.027 82800

As per Table 1 Author can clearly understand the power of compounding. If you can put a
SIP is Just Rs. 2000/ month after three years your total principal value is 72000/- and
wealth is 1,37,354/- which clearly shown above table. Let us example the Simple Interest
is 15% which shown above Table, If you put your Rs. 72000/- in Saving accounting then
you can earn at the end of third year is just Rs. 82,800/-. This difference is the eighth
wonder of the world i.e. Rule of Compounding.
Table 2
ICICI Prudential Technology Direct Plan Growth
No. of Simple Interest Simple Interest
Deposits Units Amount Profit Profit %
Yars Profit % Amount

Year 1 24000 385.8249022 24758.38 758.384 3.159933 3.15993 24782.3476

Year 2 48000 750.3052756 85257.19 37257.19 77.61914 3.15993 51033.5328

Year 3 72000 925.5895473 170373.3 98373.27 136.6295 3.15993 78825.4488

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

As per Table 2 shown above the SIP return of ICICI of the put 2000/month in SIP in
ICICI Prudential Technology Direct Plan Growth after three year your wealth is around
1,70,373/- Approximate 116% of your Simple Interest. If we can compare the Amount
column and Simple Interest Amount column so clearly shown the difference and this
difference is compound interest.
Table 3
Parag Parikh Flexi Cap Fund Direct Growth
No. of Simple Interest Simple Interest
Deposits Units Amount Profit Profit %
Years Profit % Amount
Year 1 24000 930.030509 26115.26 2115.257 8.81357 8.81357 26115.2568
Year 2 48000 1757.661816 66351.73 18351.73 38.23278 8.81357 56461.0272
Year 3 72000 2283.905264 124061.7 52061.73 72.30796 8.81357 91037.3112

As per Table 3 author makes aware about Parag Parikh Flexi Cap Fund Direct Growth
clearly show the profit is gradually increase with the time period this is the power of
compounding. If we can compare the Amount column and Simple Interest Amount column
so clearly shown the difference and this difference is compound interest. If we compare
profit percentage so Simple Interest is fixed year to year but compounding interest make
give us interest on interest that’s why the hugs difference shown in both the profit
percentage column.
Table 4
Aditya Birla Sun Life Digital India Fund Direct IDCW
No. of Simple Interest Simple Interest
Deposits Units Amount Profit Profit %
Years Profit % Amount

Year 1 24000 949.3208389 25090.55 1090.55 4.543957 4.543957 25090.54968

Year 2 48000 1849.372497 74677.66 26677.66 55.57846 4.543957 52362.19872

Year 3 72000 2337.61247 148157.9 76157.88 105.7748 4.543957 81814.94712

As per Table 4 shown above you can clearly see how can create wealth creation with the
help of SIP. You can clear see the profit percentage which can gradually increase year to
year this is the power of compounding, but this is not happen in Simple Interest. With help
of table author make aware about the growth of Aditya Birla Sun Life Digital India Fund
Direct IDCW and suggest to you that it is good for you if you think about start SIP but

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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

Aditya Birla Sun Life Digital India Fund Direct IDCW is a sectoral fund and it is highly
risky.

Table 5
Quant Small Cap Direct Fund Plan Growth
Simple Interest Simple Interest
Years Deposits Units Amount Profit Profit %
Profit % Amount

1 24000 259.2145601 25278.6 1278.604 5.327516 5.327516 25278.60384

2 48000 498.4267499 76458.66 28458.66 59.28888 5.327516 53114.41536

3 72000 621.81284 152791.9 80791.85 112.2109 5.327516 83507.43456

As per Table 5 Author can make aware for the power of compounding. If we can compare
the Amount column and Simple Interest Amount column so clearly shown the difference
and this difference is compound interest. Quant Small Cap Fund Plan Direct give 115%
interest to investors if it’s possible so only one type of Investment i.e. SIP in other words
rule of compounding. You can never think 115% interest on Simple interest or any other
schemes

Findings
1. In table 1 author interpret the data of Axis Small Cap Fund. In this table clearly
shown the power of compounding if compare with simple intersect approximate
65% more interest gain in SIP.
2. In the case of table 2 your wealth in ICICI Prudential Technology Direct Plan
Growth after three year around 1,70,373/- Approximate 116% of your Simple
Interest.
3. In table 3 author talk about the profit percentage of Parag Parikh Flexi Cap Fund
Direct Growth is increase year to year this called interest on interest. In 1st year
interest is just 8% but in 3rd year interest is almost 90% more as compare 1st year.
4. With help of table 4 author make aware about the growth of Aditya Birla Sun Life
Digital India Fund Direct IDCW and suggest to you that it is good for you if you think
about start SIP but it is a sectoral fund and it is highly risky.
5. In table 5 Quant Small Cap Fund Plan Direct give 115% interest to investors if it’s
possible so only one type of Investment i.e. SIP in other words rule of
compounding. You can never think 115% interest on Simple interest or any other
schemes
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Journal of Xidian University https://doi.org/10.37896/jxu16.8/028 ISSN No:1001-2400

Conclusion and Recommendations

As already author can mention that there is eighth wonder of the world is power of
compounding. SIP is very beneficial for retail investors who have don’t enough wealth to
invest in lump sum. For those who have regular income or have a job or any other source of
income they can put some particular amount of their income in SIP on the basis of month.
SIP starts very low amount i.e. Rs. 100/- or Rs. 500/- but there is one condition in SIP you
can see the power of Compounding in Long term.
In this paper author wants to make aware the power of compounding because in India people
have savings but they don’t invest that savings because they are not aware about value of
money, Inflation etc. Author’s main motive behind this paper everyone have a adequate
financial plan by which they can live their life smoothly. In this paper author let example of
five reputed Mutual Funds Schemes and with the help of these schemes to aware about how
people can take the benefit of compound interest.

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