Understanding the exact working behind the SIP calculator

We all must have some figure in our mind, which we want to achieve through saving over a certain duration. For example, if your ultimate financial goal is to buy a dream home by the time you retire, then you may need to build a corpus worth Rs. 50 lakhs. Someone who wants to plan for their wedding in the next seven to ten years may need to build a wedding corpus of Rs. 15 lakhs to Rs. 20 lakhs. Depending on your investment objective and the number of years you have in hand to achieve it, you can decide how much money to invest so that over the long term you are to save enough and create wealth.

Now if you want to calculate how much wealth you can create with your current SIP mutual fund investments, you can refer to a Systematic Investment Plan (SIP) calculator. But before moving to the calculator, let us understand what Systematic Investment Plan is. 

Systematic Investment Plan

Often referred to as SIP, a Systematic Investment Plan is an investment approach followed by investors who want to build a long term corpus by investing small fixed sums in mutual fund schemes. This mode of investing in mutual funds is ideal for anyone who wants to inculcate the discipline of systematic and regular investing. In SIP, the investors get to choose the investment sum and they can decide on which day of the month this amount can be debited from their savings account regularly.

SIP is better than lumpsum investing especially because one doesn’t need to have a large surplus sum to invest in mutual funds via SIP. Some mutual fund schemes are available at a SIP of as low as Rs. 500 per month. 

What is SIP Calculator?

If you want to calculate the maturity value of your SIP mutual fund investments at the end of its tenure, you can use the SIP calculator for calculating this amount. By using a SIP calculator, investors will be able to understand the exact SIP amount which they need to invest regularly to achieve the desired corpus. Irrespective of what your goal is, you achieve it using a SIP calculator by providing these details –

  1. Monthly SIP investment sum
  2. Number of months these investments will be made (ex. 120 months which means 10 years)
  3. Annual expected rate of return from the mutual fund scheme

SIP calculator is based on the following formula – 

M = P × ({[1 + i]n – 1} / i) × (1 + i)

Where –

–     M stands for the amount you receive upon maturity

–     P stands for the amount you invest at regular intervals

–     n stands for the number of payments you have made

–      i stands for the periodic rate of interest

How to use the SIP calculator?

Investors can use the SIP calculator by following these 3 simple steps – 

Determine the SIP sum

Investors need to enter the exact SIP sum which they will be investing at regular intervals which is usually every month. This sum will vary depending on your risk appetite, your current income, and your existing liabilities. 

End the number of months

Now depending on your financial goal (short term or long term), you can decide the number of months you wish to continue investing in mutual funds via SIP. 

Expected rate of return

Every mutual fund scheme delivers returns and investors need to assume returns in percentage which the mutual fund scheme might generate on an average during the investment tenure.

Investors will receive the following details –

– Total investment sum

– Returns earned

– Total corpus earned at the end of the investment journey = total investment sum + returns earned