A Deep Dive into Working of SIP Calculator

A Systematic Investment Plan is an investment method wherein individuals can invest a specific sum every month in a mutual fund scheme. A SIP return calculator is an online tool that computes the amount a mutual fund investor will realise at the end of a certain period for a specific SIP sum. It eliminates errors common in manual calculations, as computing mutual fund returns are complicated and tricky.

Read on to learn more about SIP calculators and how these can aid your investment plans.

SIP Calculator: How It Actually Works

SIP calculator

A SIP calculator takes into consideration the SIP sum, the investment period, and the rate of return. It is based on the compounding rate of interest formula but is slightly different as the principal sum is staggering and not lump-sum.

The formula is:

A = P × ({[1 + i] ^ n – 1} / i) × (1 + i)

Here, A = amount you will receive upon maturity;

P = SIP sum you intend to invest every month

i = rate of return

n = frequency or number of investments made

How To Use A SIP Return Calculator?

Search for “SIP return calculator” on a webpage and follow the steps mentioned below:

Enter the SIP sum, which is a fixed amount you intend to invest every month.

Enter the maturity period or investment period, which is the number of years for which you wish to continue investing the monthly sum.

Enter the estimated rate of return.

This way, you can compare various SIP sums and periods to determine the most suitable combination for your investment goals.

Here is an example to elucidate this functionality:

Suppose Mr X needs to save Rs. 15 lakhs for his child’s higher studies expenses. He plans to invest Rs. 5,000 every month in ABC mutual fund for 10 years. ABC offers an 11% return rate on average over this period. In that case, Mr X will have invested Rs. 6 lakhs by the end of the period and realised Rs. 10.85 lakhs.

He sees that the SIP sum does not meet his objective, so he raises the sum to Rs. 7,000. In that case, he will have invested Rs. 8.4 lakhs by the end of the period and realised Rs. 15.19 lakhs.

Note that a SIP return calculator provides only an estimation of the sum you will realise at the end of the investment period and that the actual sum may vary based on market conditions.

Benefits of a SIP Calculator

SIP Calculator

Although a SIP calculator does not offer accurate returns one can realise from a mutual fund scheme, it proves valuable in various other aspects, as mentioned below:

Compare Mutual Fund Schemes

Mutual fund schemes, depending on various factors like type and composition, offer varying rates of returns. Individuals can use a SIP return calculator to determine which scheme serves their investment objective ideally.

Plan Investments

As elaborated in the example above, a SIP calculator can help individuals decide how much to invest every month and for how long to reach their financial goals.

Easy to Use

Using a SIP calculator does not require any technical or financial know-how. Even novice investors can use this tool to determine their returns. Further, one can easily tweak the variables to compare different return rates, SIP sums, and tenures.

Wrapping Up

A SIP return calculator makes financial planning a lot easier and error-free. Further, it elucidates the power of compounding, helping even novice investors understand how a small change in the investment sum or tenure can affect final returns. Regardless, it’s crucial to note that a SIP calculator only provides an estimation of realised gains and also does not account for factors like expense ratio or exit load.

Sumit Kumar Yadav has experience analyzing business and finance of big to small companies. Loan, Insurance, Investment data analysis are his key areas.