How does SIP Calculator Work and Benefits of SIP Calculator?

The modern investor has a plethora of options to choose from. The number of schemes available in the market for investment are beyond comparison. But is this a good thing or a bad thing? Well, we feel that it is good because this proves that there is an investment scheme available to cater to the investment plans of almost every individual. However, those who lack investment knowledge or are aloof to financial planning, such people might get confused and might not be able to determine which scheme to exactly invest in. That is why a lot of financial advisors first ask investors to make a list of their short term and long term financial goals. 

Determining your financial goals is the first step of financial planning. When you have a defined set of realistic goals prioritised in the correct order, finding an investment scheme that aligns with that goal may become a lot easier. For example, if you are investing to pursue long term goals like retirement planning or looking to build a corpus to secure your child’s future, you may need to remain invested for a long period of time. On the other hand, if you need to fulfil short term financial goals like buying a new car or renovating your house, you may need to find a scheme that suits someone who has a short term investment horizon. From this, we may conclude that your goals should align with your investment horizon as well. Just having financial goals isn't enough, you need to have enough time in hand so that you give your investment an opportunity to grow. 

Those who are clear with their short term and long term financial goals, they may have to identify their risk appetite. A risk appetite is an individual’s ability to take a certain amount of risk with their investment so that they might be able to fetch some gains in the long run through those investments. Every investment scheme carries a different risk profile and hence, for investors it is necessary to know how much risk they can take with their finances. Because if you are considering investing in market linked schemes, then there's a chance of your investment portfolio suffering losses as well. There are several factors that play a role in an investor’s risk appetite. For example someone who is young and aggressive might have a high risk appetite and someone who is nearing retirement may not want to put their finances at risk. These are just assumptions that should not be considered as thorough claims. Several factors like age, income, existing liabilities, monthly expenses, etc. play an essential role in determining an individual’s risk appetite.

If you are someone who does not mind taking some extra risk with the hope of earning some capital gains in the long run by investing in market linked schemes, you may consider investing in mutual funds. Mutual funds have become an instant favourite among Indian investors in the recent past. A lot of individuals are considering investing in mutual funds as this is a unique investment vehicle that gives an investor’s portfolio the diversification it deserves. 

What are mutual funds?

What AMCs (asset management companies) generally do is that they collect money from investors sharing a common investment objective and invest this pool of funds, across multiple asset classes. The money is invested across the Indian economy in money market instruments like equity, debt, call money, corporate bonds, government securities, treasury bills, etc. Investors receive mutual fund units in quantum with the money invested and depending on the fund’s existing NAV (net asset value). 

Securities and Exchange Board of India, the regulatory body of mutual funds here in India defines them as, “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

Those who are new to mutual fund investing feel that SIP and mutual funds are the same. But in reality, SIP is a method for investing in mutual funds. Mutual fund houses generally offer two payment options for mutual fund investments - you can either make a lumpsum investment or you can start a SIP. If you have surplus cash parked with you which you feel you can invest rather than just letting it sit inactively, you may make a lumpsum investment towards your mutual funds. One good thing about lumpsum investment is that mutual fund investors get allotted more units in quantum with the investment amount and depending on the fund’s existing net asset value (NAV).

However, if you want to be consistent and regular with your mutual fund investments, and seek to gradually build a corpus by systematic regular investing, then you may opt for the SIP option.

What is SIP in mutual funds?

Like we mentioned earlier, the word SIP has become synonymous with mutual funds. This is exactly why a lot of people confuse SIP as being mutual funds. The truth is, SIP or Systematic Investment Plan is a way an investor can invest in mutual funds. It is an easy and systematic way to continue investing in mutual funds without having to manually visit the fund house every single time. If you are a KYC compliant individual, you can start investing in mutual funds via SIP right away. All you need to have is a smartphone or a laptop with a decent internet connection. You can start a mutual fund SIP simply by visiting an AMC or fund house’s website.

With SIP, all you need to do is instruct your bank, and every month on a specific date, a predetermined amount will be debited from your savings account and electronically transferred to the mutual fund. SIP can even inculcate the discipline of regularly in an investor. 

If you are finding it difficult to understand how much money you need to invest regularly in order to reach your ultimate financial goal, you may use the online SIP calculator.

What is a SIP calculator?

SIP calculator is an online tool that gives investors a fair idea of the capital gains they might receive on their mutual fund investments made via a Systematic Investment Plan. A lot of retail investors are opting for investing in mutual funds via SIP and it is quite a popular mode of investment among young investors as well. The job of a mutual fund SIP calculator is to give the investor an estimated figure or return value which their mutual fund investments might fetch over a period of time. However, people should bear in mind that the return value showcased by a SIP calculator may vary from the actual returns offered by a mutual fund scheme they have invested in. The SIP calculator does not look into factors like exit load and TER that may affect the capital gains of an investor.

An SIP calculator is designed to calculate the estimated capital appreciation from the investor’s monthly SIP investment. Like we stated earlier, the maturity amount stated by the SIP calculator is a rough estimate based on an envisioned annual interest rate.

How does an SIP calculator work?

Let us give you an example to understand how a SIP calculator works. But before that, let us understand the formula used by an SIP calculator to calculate estimated returns:

PR = P* (R* (1+i) n - 1) * (1+i)
i

PR = Potential Returns
P = SIP amount
i = compound interest return rate

This formula may be looking a bit complicated, but to help you understand let us tell you that an SIP calculator uses 4 simple steps to determine your future returns:

1. What is your investment amount?
2. For how many months do you plan to invest in mutual funds via SIP?
3. Number of SIPs (if any) already paid.
4. What is the interest rate you expect the mutual fund scheme to give?

Benefits of using a SIP calculator

Here are some of the reasons why investors should considering using a SIP calculator before investing in mutual funds:

1. Friendly user interface

   
   The SIP calculator offered by all fund houses is very easy to use. You need to put in very few details in order for the calculator to help you understand how much capital gains you can potentially earn from your investments.

2. Helps with financial planning

   
   The SIP calculator is an easy and fast way for anyone to start their mutual fund investment. Although the results are going to vary from the actual returns, it might help investors in making an informed investment decision. It doesn’t take too long for the calculator to calculate the future returns once you enter all the necessary details. You need not invest a lot of your valuable time in finding out how much you need to invest regularly in a mutual fund SIP to get to your financial goal.

3. Can be used by new as well as seasoned investors

   
   The SIP calculator works in the favor of new as well as seasoned investors. Anyone who wants to understand how much returns they should be expecting from their SIP investments in mutual funds can use the SIP calculator.

4. Know your future returns

   
   Although the returns shown by the SIP may not be bang on, they are not completely vague either. This way young as well as seasoned investors can get an estimate on the returns their mutual fund SIP investments might be able to fetch over a period of time.

5. Rupee cost averaging

   
   Since you are investing a defined amount in the mutual fund every month via SIP, you may benefit from rupee cost averaging. When the NAV of the fund is low, investors will be allotted more number of units, and lesser number of units are allotted when the NAV is high.

6. Inculcate the habit of investing regularly

   
   If you know how much you need to invest regularly to get to your goal, you may start investing regularly in mutual funds via SIP and this may inculcate a good habit of regular investing in an investor. To remain invested for the long run, one needs to give their investment a disciplinary approach and starting a mutual fund SIP might be helpful.

7. Early bird

   
   If you find out how much you need to start investing regularly using a SIP calculator, you might start investing in mutual funds at an early stage in your life. If you start early investing, then you may hold the potential to turn small investments into a decent corpus. So if you start investing early, the better it is.

Now that you know the benefits of a SIP calculator, plan on investing in mutual funds? Once you are done using the SIP calculator, make sure that you do some background check about the mutual fund you are planning to invest in. After all it is your hard earned money that you are entrusting with a fund house. If you feel that you need further help with financial planning, then seek the help of a financial advisor.

Note: SIP calculator is an illustration to showcase potential returns but investors are requested to note that the performance portrayed by the SIP calculator may or may not be met by any particular Mutual Fund Scheme and depending on the market conditions, actual result may vary.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.