Thursday, June 20

How Does A Mutual Fund SIP Calculator Work?

A Systematic Investment Plan (SIP) is a trustworthy and intriguing investment plan with promising results. Further, the expected returns can be simply calculated using the SIP calculator, assisting in decision making. But what’s the exact method of calculation of returns in this type of mutual fund investment? Is it reliable? It is necessary to understand the associated risks and to decide accordingly. Therefore, let’s understand what SIP entails in mutual funds.

What is SIP?

SIP is referred to as the mutual fund investment tool. It allows the deposit of certain amounts at a specific frequency, which ranges from weekly to yearly. The deposited amounts invested in mutual funds are subsequently translated to larger amounts over time, as per the deposit scheme. Using the compounding method to offer monetary growth, the SIP requires investment in the long run. Further, the Rupee Cost Averaging also allows for the purchase of more net asset value or NAV in friendly and affordable market conditions.

What is an SIP Calculator?

A SIP calculator is an online tool that allows individuals to identify the possible returns on their investments. With no clarification on expense ratio and exit load, the amounts obtained from the SIP calculator must only be used for reference. The obtained amount will differ from the real results owing to dependency on different factors.

SIP calculator primarily serves three purposes:

  • Helps to estimate the optimum investment amount for you
  • Aids in recognising the potential returns
  • Indicates the invested amount

What is a Step-Up SIP Calculator?

The SIP calculator also often accompanies ‘step-up-facility.’ The step-up facility refers to periodically increasing the investment. If the investor wants to use the feature, they can select it during calculation. They will get the return amounts accordingly. Utilising this feature, you will be required to input the step-up percentage, which is the rate of increase of the SIP amount.

What to Know Before Assessing SIP Calculator?

You should be familiar with the prime components of the SIP calculator to use it effectively. It is the same as other investment calculators. It requires three inputs, as follows:

SIP amount: It is the monthly investment amount that is to be invested every month. Since monthly investment plans are common, you will find this type of calculator more often.

Investment Duration: The total period of duration for which you intend to invest.

Annual Rates of Return: Stating the yearly return values will state the amount based on the previous performance of the mutual fund.

How Do SIP Calculators Work?

The SIP calculators act through the following formula:

Where FV is the expected return amount on SIP investment

P is the SIP instalment amount

r is considered in decimal and is the expressed return rate

n refers to the number of times the compounding of interest per year

t is the time duration of SIP in years

Advantages of SIP Calculator

Using a SIP calculator serves many purposes and has numerous advantages. While the purposes are discussed earlier, here are the associated benefits:

  • The calculator helps to recognise the optimum amount of investment for expected returns. It is useful in ‘what if’ scenarios or other exemplary situations. The obtained results are helpful in keeping practical expectations while making logical decisions based on the data. It is essential for finance management as well.
  • The growth of returns can be visualised via graphs or charts. Based on this, investors can understand the overall performance of their funds and decide to invest accordingly.
  • It helps to analyse financial goals. Based on the expected amount, they can identify the investment amounts and their feasibility with financial goals such as child education and others.
  • You can compare the distinct SIP plans by changing the variable values and finding the best plan suitable for you.
  • The calculators are user-friendly and hence allow you to make plans with complete privacy.

How to Use SIP Calculators?

Using SIP calculators requires information on the three variables that have to be entered. As discussed above, these are SIP amount, investment duration and rate of returns. You simply need to enter the values as per your plan of interest. Click on the ‘submit’ button, and you will get the value. For further calculations like comparing different plans, change the rate of returns. To find the feasible overall amount, change the SIP amount or duration for the specific plan of interest.

Final Thoughts!

SIP is a prominent method of investment in mutual funds. With the potential to invest in the market, it also allows compounding growth to the invested amount. However, a clear insight with accurate predictability is essential to understand the fate of your money. Helping the investors through this, the SIP calculators present themself as an efficient option. With a user-friendly interface, calculate the possible returns and plan accordingly.