How it works
Compounding means earning returns on your earlier returns, not only on the money you put in. In year one you earn on your original amount; in year two you earn on the original amount plus year one's growth; and so on. Over long periods this snowball effect can make the growth larger than the money you put in.
The calculator takes four inputs:
- an amount invested at the start (enter 0 if there is none);
- an amount added every month, which is how a systematic investment plan (SIP) in a mutual fund works;
- an assumed yearly return; and
- the number of years.
Future value = amount × (1 + yearly return)^years
For monthly investments, the calculator converts the yearly return into the equivalent monthly return, adds each month's amount at the start of the month, and grows the total month by month. A lump sum therefore grows by exactly (1 + yearly return)^years, and each monthly amount grows for the months it was invested.
Worked example
Worked example: ₹5,000 a month for 15 years
Suppose you invest ₹1,00,000 now and ₹5,000 every month for 15 years, and assume a steady 10% a year.
| Lump sum | ₹1,00,000 |
|---|---|
| Monthly amounts: ₹5,000 × 12 × 15 | ₹9,00,000 |
| Total put in | ₹10,00,000 |
At an assumed 10% a year, the calculator shows the total growing to roughly ₹24 lakh, of which about ₹14 lakh is growth. Most of that growth comes in the later years, when the balance is largest. Try changing the years from 15 to 10 and notice how much the result falls: time matters more than most people expect.
How to read the result
The result answers "what if?", not "what will happen". Use it to compare scenarios: starting five years earlier, investing a little more each month, or assuming a lower return. If a plan only works at a high assumed return, it is a fragile plan.
Limitations
- No real investment returns the same amount every year. Shares can fall sharply in some years and rise in others. The order of good and bad years affects what you end up with, especially when you are adding money regularly.
- Inflation is ignored. ₹24 lakh in 15 years will buy much less than ₹24 lakh today. The real return calculator shows the difference.
- Costs and taxes are ignored. Fund expenses, brokerage and taxes reduce the real outcome.
- The assumed return is your choice. The calculator cannot tell you what return is realistic. Past returns of any market or fund are not a promise about the future.