How SIP Returns Are Calculated (and Why the Maths Surprises People)
Written by lemmatools Editorial Team · Last updated: · 6 min read
Why SIP maths is different from FD maths
In a fixed deposit, one sum compounds for the whole tenure. In a SIP, your first instalment compounds for the full period but your last one for barely a month — so the corpus is the sum of 120 or 240 mini-investments, each with its own growth window. The closed-form version is the annuity-due formula: M = A × ((1+i)ⁿ − 1) ÷ i × (1+i), where A is the monthly instalment, i the monthly return (annual ÷ 12) and n the number of months.
The practical consequence: over 10 years at "12%", your money does not grow 12% × 10. ₹10,000 a month (₹12 lakh total) becomes about ₹23.2 lakh — a 1.94× multiple, not the 3.1× a lump sum would enjoy, because the average rupee was invested for only ~5 years.
Worked example: ₹10,000/month, 12%, 10 years
- i = 12 ÷ 12 ÷ 100 = 0.01; n = 120.
- (1.01)¹²⁰ = 3.3004.
- M = 10,000 × (3.3004 − 1) ÷ 0.01 × 1.01 ≈ ₹23,23,391.
- Invested ₹12,00,000 → gains ₹11,23,391. Nearly half the final corpus is growth.
Stretch the same SIP to 20 years and the corpus is ₹99.9 lakh — invested ₹24L, gains ₹76L. The second decade contributes three-quarters of the wealth. Time in the market is not a slogan; it is the dominant term in the equation.
XIRR: the number on your statement
Fund statements report XIRR, not the simple average return. XIRR is the single annual rate that, applied to each of your dated cashflows, reproduces your current value — effectively the "i" of the formula solved in reverse from reality. It is the correct way to measure SIP performance, and the right number to compare against the assumption you used when planning. If you planned at 12% and your 5-year XIRR is 9%, the goal SIP calculator will tell you the top-up needed to stay on track.
Mistakes that distort SIP planning
- Assuming past bull-market returns (15–18%) will persist — plan at 11–12% for equity and be pleasantly surprised.
- Judging a SIP after 1–2 years: short-window XIRR mostly measures market mood, not your plan.
- Stopping instalments in a crash — the cheap units bought in downturns are precisely where SIP outperformance comes from.
- Ignoring the step-up: increasing the SIP 10% a year roughly *doubles* a 15-year corpus versus staying flat — see the step-up SIP calculator.