How does an SIP calculator work?
A Systematic Investment Plan (SIP) is a smart and cost-effective way of investing in mutual funds. Through an SIP, you can invest a fixed sum of money at regular intervals, i.e., weekly, monthly, quarterly, etc. This allows you to average out the cost of your investment, which can help you earn higher returns over the long term.
But how do you calculate the amount you will accumulate on your regular SIP investments? That’s where the SIP calculator comes in! An SIP calculator is an online tool that helps you estimate the growth of your SIP investment and determine the potential returns. Take a closer look at how the SIP calculator works and how you can use it to make the most of your investments.
How does the SIP calculator work?
An SIP calculator can be used to compute the required monthly investment amount and the total return on investment. For these calculations, you will need to input some basic information, including:
- Monthly investment amount
- The expected rate of return
- The number of years you want to remain invested to reach your target corpus
Using this information, the calculator can provide an estimate of the amount you need to invest in SIPs each month along with how much your investment will be worth when you reach your goal.
Here is a quick example to understand how SIP calculator works
Let’s say you want to invest Rs 10,000 per month for 10 years at an annual return rate of 12%. You open the SIP calculator (available on various websites online) and input these numbers into the tool. Based on the inputted information, the calculator will show you the maturity value at the end of the investment tenure.
In this case, your mutual fund investment would grow to Rs 23.23 lakh approximately. Of this, the returns will account for Rs 11.23 lakh, while the principal amount invested will be Rs 12 lakh. Moreover, the graphical representations available with most SIP calculators can help you visualise these results even more clearly.
How can an SIP calculator help investors?
The primary benefits of an SIP calculator are as follows:
- It eliminates the risk of manual errors and inaccuracies in your investment return estimates. Rather than having to spend hours poring over financial reports or running calculations manually, a good SIP calculator can show your mutual fund investment returns with just a few clicks of a button.
- Most SIP calculators are free to use, which means that investors don’t have to worry about incurring any hidden costs. Moreover, it provides precise and accurate results by using the compound interest formula.
- It lets you determine whether your current rate of return is consistent with your risk tolerance and desired level of return.
- By using an SIP calculator, you can compare different scenarios. For instance, what happens if you increase your SIP investment amount by 5% every year or what happens if you invest for five years instead of 10. This helps choose the best plan, allowing you to reach your financial goals faster.
- Using an SIP calculator can also help instil financial discipline in investors as it encourages them to regularly invest small amounts of money over time.
Thus, an SIP calculator is an important tool that can help you make the most out of your SIP investments. By evaluating a few important factors, it lets you create and customise an SIP investment plan that is well-suited for your financial profile.