While some potential investors might confuse SIPs with mutual funds, it’s essential to note that SIPs represent a method of investing in mutual funds, alongside the lump sum approach. A SIP calculator serves as a valuable tool in estimating potential returns when allocating funds to these investment avenues.
A Systematic Investment Plan (SIP) involves consistently investing a predetermined amount in mutual funds at regular intervals. Typically, SIPs offer investment options on a weekly, quarterly, or monthly basis.
What is a SIP Calculator?
A SIP calculator serves as a straightforward tool enabling individuals to gauge the potential returns from their mutual fund investments conducted through SIP. Recent trends show that SIP investments in mutual funds have gained substantial traction among millennials, emerging as a popular investment avenue.
These calculators are specifically designed to offer potential investors an approximation of their mutual fund investments. However, it’s crucial to note that the actual returns from a mutual fund scheme can vary due to several factors. The SIP calculator does not account for exit loads or expense ratios, if applicable.
This tool calculates wealth accumulation and anticipated returns for monthly SIP investments. It provides an approximate estimate of the maturity amount for any monthly SIP based on projected annual return rates.
How can a SIP return calculator help you?
SIPs are a more lucrative mode of investing funds compared to a lump sum amount according to several mutual fund experts. It helps you become financially disciplined and create a habit of savings that can benefit you in the future.
A SIP calculator online is a beneficial tool, which shows the estimated returns you will earn after the investment tenure.
Few of the benefits of SIP calculators include –
- Assists you to determine the amount you want to invest in.
- Tells you the total amount you have invested.
- Gives an estimated value of the returns.
How do SIP calculators work?
A SIP plan calculator works on the following formula –
M = P × ({[1 + i]^n – 1} / i) × (1 + i).
In the above formula –
- M is the amount you receive upon maturity.
- P is the amount you invest at regular intervals.
- n is the number of payments you have made.
- i is the periodic rate of interest.
Take for example you want to invest Rs. 1,000 per month for 12 months at a periodic rate of interest of 12%.
then the monthly rate of return will be 12%/12 = 1/100=0.01
Hence, M = 1,000X ({[1 +0.01 ]^{12} – 1} / 0.01) x (1 + 0.01)
which gives Rs 12,809 Rs approximately in a year.
The rate of interest on a SIP will differ as per market conditions. It may increase or decrease, which will change the estimated returns.