A lump-sum investment has one clean number attached to its growth — money in on day one, money out on the last day, compounded at a fixed rate in between. A SIP doesn't work that way: every monthly installment starts compounding on a different date, so there's no single "years invested" figure to plug into a simple compound interest formula.
The formula behind a SIP projection
SIP calculators use the future value of an annuity due — each installment is assumed to be invested at the start of the month:
FV = P × [((1 + r)^n − 1) / r] × (1 + r)
- P — monthly investment amount
- r — expected monthly return (annual rate ÷ 12)
- n — number of installments
For example, ₹10,000/month for 15 years at an assumed 12% annual return (r = 1%, n = 180) works out to roughly ₹50 lakh — against total contributions of ₹18 lakh. The gap between the two is compounding, but note this number is a projection based on an assumed constant rate, not a guarantee.
Why CAGR doesn't apply to a SIP
CAGR (compound annual growth rate) answers "what constant rate turns this starting value into this ending value over this many years?" — it needs one investment date. A SIP has dozens or hundreds of investment dates, each with a different holding period by the time you check your returns. Applying CAGR to a SIP's total contribution and current value overstates or understates the real return depending on market timing within the period.
XIRR: the number that actually fits
XIRR (extended internal rate of return) is built for exactly this — irregular cash flows on irregular dates. It finds the single annualized rate that, if applied to each installment individually from its own investment date, would produce your current portfolio value. This is the number your mutual fund platform shows as your SIP "return," and it's the correct one to compare against a fixed-return instrument's stated rate.
Rupee cost averaging: the other half of the story
Because each installment buys units at whatever the price is that month, a SIP automatically buys more units when prices are low and fewer when prices are high. This smooths out the average purchase cost over time — it doesn't guarantee a better return than a lump sum, but it removes the need to time the market with a single large investment.
Project your own numbers
Use the SIP Calculator to project the future value of a monthly SIP at your own contribution amount, tenure, and expected return.