SIP Calculator

When you invest in mutual funds, you need to pay for your investments. SIP or Systematic Investment Plan is one of the various ways to pay for such investments. To calculate the returns that you’d be getting for investing in your mutual funds via SIPs, you need to use a SIP calculator as a convenient method. While you can also perform this calculation manually, it is a tedious task to do so.

This blog will take you through the process of calculating returns on your monthly investments using SIP calculator, whilst also explaining how a SIP calculator works.

Understanding SIPs

SIP stands for Systematic Investment Plan which, unlike its interpretation, is not a type of mutual fund but a way of investing in mutual funds. SIP stands in contrast to lumpsum investments because investors pay regular amounts of money to buy units and invest in funds via the SIP mode, whereas in the entire investment amount is paid at once in lumpsum. This allows the investors to build capital over specific tenure through small contributions and inculcates a habit of disciplined investment among them.

The purchased mutual fund units earn gains that are reinvested every month, thereby giving a compounded growth. Moreover, SIPs allow investors to stay away from the worry of the right market timing to invest the money. It is spread over a period of time in which the market goes through upheavals and the cost of purchase of units also gets averaged out.

Here are a few key points to note about SIPs-

• Systematic Investment Plan aka SIP is a process of investment in mutual funds
• Mutual fund units are bought each time an investor makes a SIP payment
• SIP investments offer the benefits of power of compounding, rupee cost averaging, capital appreciation, etc. to the investors
• SIPs fulfill the investment goal of investor’s wealth creation in the long term
• SIP investments do not levy tax on investments but levy capital gains upon redemption

What is a SIP Calculator?

A SIP calculator is simply a tool that allows investors to calculate their returns on investments made in mutual funds via SIP. SIP calculator is a type of mutual fund investment calculator that gives an idea to the potential investor on how his/her investment will work in the future.

However, it is important to note that SIP calculator only gives an idea of how the returns on mutual fund investments would look like. The actual returns that the investor would earn on his investments vary depending upon various fluctuating factors. Additionally, SIP calculator does not inculcate the exit load or expense ratio on mutual fund investments, if any.

How does SIP Calculator Work?

SIP calculator works on the following formula-

M = P * ({[1+i] n - 1} /i ) * (1 + i)

Where-
M = Amount that the investor will receive upon maturity
P = Amount that the investor invests at regular intervals (SIP amount)
N = Number of SIP payments made by the investor
i = Periodic rate of interest

Let’s take an example to understand how this formula works-

Suppose, you wish to invest Rs. 1000 per month for 12 months at a period interest rate of 12%. So, your monthly rate of return would be 12% /12 = 0.01.

Now, as per the above formula, your returns on investment would be-

M = 1000 * ({[1+0.01] {12} - 1} / 0.01) * (1 + 0.01)
M = Rs. 12,809

It is important to note that the rate of interest on your SIP would vary depending upon the varying market conditions. Hence, the return on investment derived using this formula or SIP calculator would vary.

How to Calculate Returns Using SIP Calculator?

Using the SIP Calculator, you simply need to enter the basic details related to your investment. These details include your monthly investment amount, your expected return rate and the time duration of your investment.

Upon entering these details, the SIP calculator would instantly show you your investment amount, estimated returns on your investment and the total amount that you would receive at the end of your investment tenure.

Who should Invest in SIP?

Anyone who seeks to invest in mutual funds can invest in SIP. However, a few factors must be borne in mind such as-

• Investors with a long-term horizon should invest in SIP as they can offer optimum benefits in a longer tenure
• Investors who do not have enough surplus cash to invest as a lump sum in MFs but aim for capital generation should consider investing through SIP. SIPs do not dig a hole in the pocket and create a regular investment habit
• SIPs are also considered ideal for investors with low income or limited resources like students, freshers in the jobs, low-paid employees, etc.
• Although SIPs can be done in the case of debt as well as equity funds, the SIPs become more profitable when invested in equities. Debt funds are ideal because they are safe investments with higher liquidity and better returns than bank deposits. Equities carry higher risk because of being market-linked but have higher growth potential. Moreover, SIPs offer the power of compounding against the lump sum investment with the benefit of Rupee Cost Averaging (RCA)

Wrapping it Up:

SIP calculator calculates the wealth gain and expected returns on your monthly investments via SIPs. Using a SIP calculator, you will get a rough estimate on the amount that you will receive upon maturity of your mutual fund investments, based on a projected annual return rate. SIP calculators allow you to plan your investments based on the SIP amount and investment tenure. It also helps you compute an estimation of the total value of your investment at the end of your investment tenure.