Investment Planning: Here’s what you should know about SIP Calculator

A SIP calculator is a popular online investment tool that helps estimate the returns on mutual fund scheme investments routed through a systematic investment plan. The smart calculator automates the calculation process and offers results by weighing investment variables such as investment amount, frequency of compounding, investment tenure, and anticipated rate of return to determine estimated earnings and maturity amount. While individuals can calculate SIP returns manually, the process is complex, time-consuming, and very prone to human errors. Let’s not dismiss the fact that a minor calculation error can significantly affect the accuracy of the outcome and jeopardize investment planning. Therefore, using an online SIP calculator is a convenient and more reliable option to estimate returns on SIP.

Why Use An Online SIP Calculator?

The SIP calculator is a free investment tool that helps ascertain the returns on mutual fund scheme investments and how the invested money will grow over the investment period. Investors can use the availed outcome to plan their mutual fund investments via SIP or assess the potential of their portfolio and predict its performance. Based on the estimation, they can make changes to their approach to boost their SIP earnings.

However, investors must note that SIP calculators typically do not consider inflation. Therefore, they must manually compute the interest rate they anticipate from SIP only after they consider the current and projected inflation rate. This will help the users determine whether their anticipated returns on investment will beat inflation or if they should switch up their principal investment.

It is now common knowledge that a SIP calculator allows individuals to adjust investment variables, like the principal investment amount, rate of interest, and investment tenure. This feature allows users to find the best combination of variables for them to achieve their investment goals, such as generating inflation-adjusted returns and accumulating substantial wealth. Above all, to use the calculator, individuals just need to enter relevant variables, making it easy to use and hassle-free.

Formula Used in SIP Calculator

An online SIP calculator removes the need to compute returns manually. However, to do so, it is fed with this SIP formula –

FV = P x {[(1 + r)n – 1] ÷ r} x (1 + r)

In this formula, 

FV is the maturity value 

P is the principal investment amount

R is the estimated rate of return 

n is for the frequency of contributions

Using this formula the calculator helps users find the following – 

1. Ideal principal amount that will help them achieve financial goals
2. Returns on mutual fund scheme investment routed via SIP
3. Ideal investment tenure to accumulate wealth to meet financial goals

The same formula can be used to compute the returns manually. However, the process will have multiple steps. Let’s take a look at an example to understand the same.

An Example of SIP Calculation 

Sumedh wants to estimate the returns from an SIP mutual fund of monthly Rs. 1000. He wishes to remain invested for 24 months and expects a rate of interest at 12% annually. After using he found – 

FV = P x {[(1 + r)n – 1] ÷ r} x (1 + r)

FV = Rs. 1000 x {[(1 + 0.01)24 – 1] ÷ 0.01} x (1 + 0.01)

FV = Rs. 27,243

At maturity, Sumedh would receive approximately Rs. 27,243. 

Steps to Use an Online SIP Calculator

Accessing a reliable SIP calculator is very easy these days. All they need to do is visit the official website of a trusted financial or investment portal and enter key investment details into the tool to make it work.

Here’s what one needs to enter in the tool – 

• Principal amount or initial investment amount: The sum of money individuals intend to invest in mutual funds via a systematic investment plan on a prefixed date.
• Investment horizon: The period during which the decided principal amount will remain parked in the mutual fund. This investment period is typically expressed in the number of years. Generally, staying invested in the scheme for the long term is considered to be more effective for accruing higher returns on investment and spreading out the associated risk.
• Investment strategy: An investment plan that enables individuals to determine the average returns they expect to generate in a year. Individuals have the option to pick among aggressive, balanced, or conservative investment strategies if the same is available in their choice of SIP calculator.

After all these details are entered in designated fields of the calculator the tool can compute the same and show the outcome in a few seconds. The entire process can be divided into these simple steps –

Step 1: Open the SIP calculator page

Step 2: Enter the principal investment amount

Step 3: Enter the investment tenure 

Step 4: Provide the rate of return 

Based on the outcome the user can tweak the inputs and arrive at a profitable combination that offers desired results. However, the same tool will not be useful if they need to calculate their annual tax returns or liability. In that case they will have to use a tax calculator. Nevertheless, individuals can make the most of the SIP tool by keeping a few tips in mind.

• Invest more money. The more an individual invests upfront via SIP, the more money they can potentially earn from it over time.
• Invest longer. The longer an individual stays invested in the scheme, the more time their invested money has to compound and grow. Compounding is essentially allowing one’s earnings to generate even more earnings, which can impact the overall returns on investment significantly.
• Invest regularly. Even if an individual can only put away a small amount each month in SIP, it will add up over the investment period, accumulating earnings.
• Choose the right kind of mutual funds. Individuals must for mutual funds that have a proven track record and align with their investment goals and risk-taking capacity to make fruitful earnings.

In addition, it is recommended that investors reevaluate the components of their portfolio and assess their investment approach regularly to understand which investment instruments are working for them and which are not. Weeding out the least profitable ones after thorough assessment will help them build a reliable portfolio.