How SIP returns actually work: the compounding, the XIRR trap and the inflation you forgot

Each instalment compounds for however long remains until the goal. The first payment you make gets the full period of growth; the last payment gets almost none. Adding those up gives the future value of a series of deposits: FV = P × [((1 + i)^n − 1) ÷ i] × (1 + i), where P is the monthly amount, i is the monthly rate (annual rate ÷ 12), n is the number of months, and the final (1 + i) factor accounts for investing at the start of each month rather than the end.

You do not need the formula to use the tool, but knowing that the exponent applies to n — months, not years — explains why a 20-year SIP produces a result that feels disproportionate. Doubling the duration does not double the outcome, because the growth compounds.

In the 20-year row above, the difference between ₹5,000 a month for 15 years and for 20 years is roughly ₹30 lakh of projected corpus for an extra ₹3 lakh of contributions. Those last five years are where compounding stops being arithmetic and starts being noticeable.

The practical lesson is not "invest longer" — that is the same advice everyone gives — it is that the sensitivity of the final number to time is much higher than its sensitivity to the assumed rate for the first decade. A ₹5,000 SIP for 20 years at 12% projects to about ₹49.96 lakh; the same SIP at 10% projects to roughly ₹38 lakh. Raising the contribution by ₹1,000 a month moves the number by more than three percentage points of assumed return over a shorter horizon, and does so with certainty rather than hope.

Once you have invested for a few years, your fund statement shows an annualised return — XIRR — that often sits below the fund’s published five-year return, even when the fund has done exactly what was advertised.

The reason is timing. Money you invested two months ago has not participated in the returns of the last five years. XIRR weights every rupee by how long it was actually invested, which is the mathematically correct way to measure your personal return, and it is why SIP returns differ from lumpsum returns in the same fund over the same period. A fund that returned 13% annually over five years might show you an XIRR of 9% for your SIP that started three years in — not because anything went wrong, but because half your money has been invested for less than three years.

The honest use of XIRR is comparing one of your own investments against another, or against the same plan across years. It is not a verdict on whether the fund is any good.

Every SIP calculator, including ours, produces a smooth line that real markets will not deliver. The distortions are predictable.

• Steady returns do not exist. A 12% average can be +40%, −25%, +8%, +18% in four consecutive years and still average out. Your corpus path will not look like the projection, and there will be years when the screen is red and the contribution feels pointless.
• Inflation is invisible in the number. ₹49.96 lakh in twenty years is not ₹49.96 lakh of today’s purchasing power. At 6% inflation, it buys what roughly ₹15.6 lakh buys today. Projections for long goals that ignore this overstate the outcome badly.
• Taxes and costs are real. Equity scheme returns are reduced by the expense ratio every year, and capital gains tax applies on redemption: as things stand, 12.5% on equity long-term gains above ₹1.25 lakh in a financial year, and 20% on short-term gains. Check current rates before you plan around them.

Instead of asking "what will ₹5,000 a month become", work backwards. Decide what the goal costs in today’s money, inflate it to the goal date at a rate you consider realistic (6% is a reasonable planning number for Indian urban expenses), then solve for the contribution needed at a return assumption you are willing to defend — 10% rather than 12% makes the plan survive a bad decade.

Worked example: a ₹20 lakh goal in today’s money, fifteen years away, inflated at 6% becomes about ₹47.9 lakh. At a 10% assumed return, that needs roughly ₹11,500 a month. At 12%, roughly ₹9,600. The gap between those two numbers is your safety margin, and picking the higher contribution is how projections stop being fragile.

Finally, run the step-up. Increasing your SIP by 10% every year when your income rises shortens timelines dramatically and is far more reliable than assuming a higher rate of return. A step-up is something you control; a return is not.

A projection is not a promise, and a fund’s past performance is explicitly not indicative of future results. Equity investments carry market risk: the value of your units falls as well as rises, and a goal dated two years out should not be funded by equity at all. This guide is arithmetic and education, not investment advice — for a decision about your own money, speak to a registered investment adviser who can see your full picture.