How do we trust power of compounding with mutual fund SIP

Question

When I search for SIP Mutual fund plans, often I see huge money returns in the long run.

But when I research, it's usually mentioned as Power of compounding, that's how they're able to return such a hefty amount.

Their only condition is 40 years of period and 100000 Rupees(1 lakh) per month and 11.5% returns is attainable. I guess, because there are so many plans which offer more than that anyways.

Can someone help me understand if it's practical to expect near a 1000000000 Rupees (100 crore) as total returns?

Update:

Inflation rate in my country is 7.5 then Is it right to subtract the inflation rate in returns rate (11.5) and whatever the amount that I'm getting now.. and whatever things I can buy right now with that amount is what I'd be able to buy after 40 years ? would that be right assumption to make ?

Answer 1

40 years is a long time, and 11.5% is a large interest rate. They combine to produce a huge return. This is easier to see if you use simpler numbers. If you start with 100, and get 10%, after 1 year it's 110, after 2 years 121, after just ten years it's almost 260 -- much more than doubled -- after 20 years nearly 7 times the original, and so on. You can do this math yourself to see what compounding can do.

It's sensible to ask "is that possible?" and the thing is, yes it's possible given those assumptions, but are those assumptions possible? Can the fund manager get 11.5% returns for so long? Can you put money in and not use it from age 20 to age 60?

Also, thanks to inflation, a particular amount of money 40 years from now won't buy what it would buy today. So if you're thinking "I could invest one month's rent, and after 40 years that would buy a whole house!" no it wouldn't.

A more useful measure of investment returns is the percentage after inflation. If you can get 4% after inflation (and taxes, if it's not a sheltered instrument), then you're doing well.