The systematic investment plan is a popular route of investment for beginners and risk-averse investors to park their money in mutual funds while being exposed to relatively fewer risks. To ensure a hassle-free investment experience, beginners may use a SIP calculator to determine what they might expect at maturity to ensure that they are getting a solid return on their investment. However, in order to utilise the investment tool successfully, users must understand how to use a SIP calculator and the basic principle behind the tool.
Read along to know more about the SIP calculator and its use.
What is a SIP Calculator?
A SIP calculator is an application designed to enable users to determine the returns on their SIP portfolios. The online tool analyses the user’s investment variables to project the earnings rate and the maturity amount after a specified time. While one can also determine the maturity value through manual computation, the process is considered to be labor-intensive due to the complex nature of the formula, multiple steps, and the monthly payment option. The varying holding periods for each contribution produce varying returns for each payment, making the manual process tiring. This is why it is useful to know one’s way around the SIP calculator and simplify the process significantly.
A SIP calculator helps split the total investment of a user’s contribution into a systematic investment plan into 2 figures:
- The amount invested or principal
- The expected return
A SIP return calculator shows how the invested sum of money may increase over time at a specific rate of return in a pre-fixed time horizon.
The online tool can enable you to take into account the impact of inflation on the investment amount indirectly. To determine the same, you need to manually determine the rate of return on the principal amount based on the actual rate of return and the prevailing inflation rate. Once you’ve discovered the information, enter the manually calculated rate of interest into the SIP calculator.
What is the SIP Calculator Formula?
Investors do not need to manually calculate their SIP investments. However, knowing how the same functions is still an excellent way to ensure its accuracy and overall performance.
Here’s the SIP formula used by the SIP calculator to assess investment value and maturity value –
FV = P x [(1 + r)n – 1] r x (1 + r) r x (1 + r)
In this formula,
FV denotes the SIP investment is its future value
P denotes the principal investment amount
R denotes the expected monthly rate of return
n denotes the total number of contributions
Example: Sweta wants to determine the FV for a Systematic Investment Plan of Rs. 1000 a month for 2 years at an expected rate of return of 12% per annum. She will use the following formula to use the maturity value.
FV = Rs. 1000 x {[(1 + 0.01)24 – 1] ÷ 0.01} x (1 + 0.01)
Indeed, manual calculation involves several complex steps and is prone to manual errors. However, Sweta can avoid the hassle by simply using a SIP calculator online.
Systematic Investment Plan Calculation
A SIP savings calculator can help find three figures:
- Principal
- Investment Returns
- Future value
As a result, it shows how much you may make from your investment if you invest, say, Rs. XX per month for Y number of years at a rate of Z%. This is useful for folks who have a certain financial goal in mind and planned their investments to help them accomplish it.
Take for example,
Radhika wants to put money into her sister’s college fund so that she can accumulate Rs. 20 lakhs after 5 years. To achieve this goal, she decides to invest Rs. 20,000 monthly in a mutual fund via SIP that will offer returns at the rate of 12%.
Radhika uses the SIP savings calculator to enter investment details to determine the maturity amount:
- Principal investment amount: Rs. 12 lakh
- Returns on investment: Rs. 4.5 lakh
- Maturity value: Rs. 16.5 lakh
The findings revealed that Radhika would fall short of her target by around Rs. 3.5 lakhs by the end of 5 years. Since she found out this detail before investing in SIP, she can modify her monthly investment and help her meet her financial goal.
The best thing about the SIP calculator is that it allows users to make multiple adjustments to the mix of investment duration, principal amount, and SIP approach that suits their goals and risk appetite the best.
How to Use SIP Calculator?
To use the SIP calculator effortlessly, users must know about the variables they are required to feed into the financial tool.
Amount of Investment
This is the amount of money an individual would like to put in mutual funds through the SIP method at regular intervals, such as monthly, quarterly, and so on.
Investment Horizon
It represents the investment duration in years. In other words, it specifies the time frame for which an individual would want to continue a SIP.
Strategy for Investment
It assists in determining the average yearly return on the investment that investors might expect. Investors may choose among aggressive, conservative, or balanced investing methods and input an estimated rate of return from the “custom” menu.
Here’s how to use the SIP calculator –
Follow these simple steps to determine SIP returns:
Step 1: Open a trusted online SIP calculator
Step 2: Enter the principal investment amount
Step 3: Enter the tenure and the expected rate of return
Step 4: Enter the investment horizon
After these details are entered, the SIP calculator will show the returns on investment and maturity amount.
This way, a SIP calculator can help find key investment details and help plan the same more effectively. The fact, the financial tool allows multiple adjustments for free, users can find out which combination of principal amount and investment horizon would be best suited for their budget and help meet their financial goals without straining their available finances.
Photo Credit: Navi
