Last Updated on March 19, 2024 by ethinos
A SIP, or a Systematic Investment Plan has won the hearts and minds of many investors in recent times. It is a popular way of investing your capital in a plan that is effective and flexible. It also affords discipline and efficiency in investment and may offer more lucrative rewards than other investment instruments available to you. With a SIP, you essentially invest in a mutual fund. A SIP calculator can help you in your decision-making process to invest in a SIP as this is an easy and convenient way to calculate amounts to invest and potential returns. With invaluable tools like SIP calculators available online, it is important to grasp their functions and how they aid you in leveraging the most from your SIP investment.
Also Read: ELSS Calculator – A Step-by-Step Guide to Assess Your Investments
Table of Content
What is a SIP?
Before you delve into the use and operation of a SIP calculator, you need to understand how an investment like a Systematic Investment Plan (SIP) works. So let’s get the basics of a SIP right first.
A Systematic Investment Plan is a way of investing in a mutual fund. Here, an investor can invest a set amount of capital at regular fixed intervals. Typically, an investor invests a particular amount in a given mutual fund on a monthly basis, but you can also invest on the basis of other durations available. This is a method of investment that permits investors to collect wealth over periods through the process of compounding as well as the method of rupee-cost averaging.
Also Read: 5 Steps to Become Financially Independent
Understanding a SIP Calculator
Making a prospective investment decision in financial management is important if you want to attain your financial goals. This is where a SIP calculator can help you make decisions about which SIP to invest in according to your unique financial requirements, time horizon, risk potential, and overall goals of investment.
Essentially, a SIP calculator is an online financial tool that is specifically designed to aid investors in estimating the potential returns/gains on specific SIP investments. The calculator makes use of different parameters like the amount of initial such as investment, tenure of investment, expected return rate, and how frequently you can invest. In this way, the SIP calculator provides an investor with an approximation of the amount that investors can collect over a period.
The Key Parts of a SIP Calculator
To understand the workings of a SIP calculator and how it helps you to make informed investment decisions, you should know about its main components:
- Amount of Investment: This is the amount (the principal) that the investor invests at regular or frequent intervals.
- Tenure of Investment: This is the duration for which the investor commits to stay with the SIP.
- Expected Return Rate: This is an annual return rate (based on an average rate of return) that an investor expects to achieve out of the mutual fund.
- Investment Frequency: This is the measure of how frequently or regularly an investor makes a contribution to the SIP. Generally speaking, contributions to a SIP are made monthly.
The Working of a SIP Calculator
Calculations on a SIP calculator are done automatically through a mathematical formula. According to the inputs you provide, SIP calculators consider the process of compounding and give you estimations of the value of your investment in the future. Compounding through a SIP is essentially earning interest on the investment you make in a SIP as well as earning interest on accumulated interest amounts. You get an estimate of the maturity amount at the conclusion of the tenure of investment.
As a SIP calculation example, you could consider the following:
If you make an investment in a SIP amounting to ₹5,000 a month and your expected annual return is 12%, the value of your SIP investment over 5 years would amount to ₹3,23,504.8 approximately.
Benefits of Using a SIP Calculator
By using the SIP calculator, you get the following advantages:
- Accuracy in Calculations: You get accuracy in your estimates so you can set proper financial goals.
- Financial Planning: By making near-precise calculations and getting rough estimates, you can plan for certain financial goals like education or marriage.
- Making Comparisons: With a SIP calculator, you can compare investment amounts and choose those that will likely suit your financial requirements according to investment tenures.
- Making Informed Decisions: A SIP calculator helps you to make informed decisions about your financial future by knowing about likely outcomes from your investment.
Also Read: Retirement Calculator: All You Need to Know
Using a SIP Calculator
You can use SIP calculators on various portals online and these are free of cost to use. All you have to do is enter your SIP amount, your expected return rate, and the frequency of your SIP investments. The calculator will generate results and show you the predicted maturity and the total amount you have invested for the given tenure.
Words to End With
SIP calculators are proficient devices that you can use to get estimations of how much you can expect to earn with your SIP. However, when you are putting details into the calculator, you must consider realistic rates of return. Also, while using a calculator to provide an estimate of your returns from a SIP investment, you should consider that a SIP basically invests in a mutual fund that may be subject to market risks.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only.
