Mutual Funds

Understanding SIPs and using a SIP calculator

Save & Invest

You can understand all about SIPs, the different types and the advantages of SIP, using SIP calculators, etc.

Steps to Calculate Your SIP Returns With Calculator

Systematic Investment Plans, or SIPs, are a way to invest in mutual funds or stock shares. You make regular payments for this type of investment. Over time, your overall investment grows. Depending on your financial savings, SIPs can be made weekly, monthly, or quarterly. The benefit of SIP is that it promotes long-term wealth growth. If you have a sizable amount of funds, you can also invest in lump sums.

SIPs have many advantages compared to lump-sum investing. This is explained in the following sections:

Types of SIPs

Equity SIPs or mutual fund SIPs can be of two types:

1) Regular SIPs: You invest a constant amount periodically over a long period.

2) Step-up SIP: Let’s say you were just promoted to your current position. This may come with a pay raise. You might wish to increase the size of your SIP. You can raise the SIP amount by carrying out a step-up SIP. 

Using a SIP Calculator

You will find many SIP calculators online on different broker sites. A mutual fund SIP calculator can be used in the following ways:

Step 1: First, enter the SIP amount that you invest 

Step 2: Enter the period you want to invest in the SIP. This period is the investment tenor. Note that this has to be a correct figure. This period is the period up to the maturity date. 

Step 3: Enter the expected return rate on the mutual fund. It is the interest rate if it is a debt mutual fund SIP. For an equity mutual fund SIP, use the 5-year historical rate of return for the return percentage.

Step 4: Click Calculate now

The total cumulative amount from your SIP will be calculated using the SIP calculator. This includes the accumulated principal plus interest or returns thereon. 

Advantages of using a SIP calculator:

1) A SIP calculator is a reliable tool to estimate the total value of your investment.

2) A SIP calculator is a commonly available online tool. You can easily access a SIP calculator on any broker’s site or online site selling mutual funds.

3) A SIP calculator accurately estimates the accumulated investment from your SIPs over long periods.

4) You don’t need any assistance. The data inputs that a SIP calculator needs are available to you. There are no complicated steps.

Step-up SIP calculator

There are other online step-up SIP calculators available to calculate your total investment.

The same fields are present in a step-up SIP calculator as in a SIP calculator.

In the output cell, a step-up SIP calculator also shows the following data:

  • the total accumulated amount,
  • an estimated return,
  • a growth table of how your SIP contributions are growing,
  • a growth chart for your reference, 
  • the step-up SIP shows you a pre-estimate of your step-up SIP amount.

The formula applied for calculating SIP returns

FV= P X (1+i)^(n-1)X 1/(1+i)^I where

FV= Future accumulated value of your SIP investments

P = SIP instalment being invested by you

i/r = compounded rate of return

n= investment tenor

r= expected rate of return

“i” converts “r”, the expected rate of return, into a compounded rate of return. This SIP return is known as the compound annual growth rate of returns. The formula does not need to be manually calculated. This challenging calculation is made using the SIP calculator. 

Why should you start a SIP in equities or mutual funds?

1) A SIP does not call for large savings. You can start a SIP with amounts as small as Rs. 500 a month.

2) A SIP helps you meet multiple financial goals. You can start separate SIPs one after the other.

3) It is the first step in achieving your goal of maximising your money. Everyone is familiar with the story of the crow holding a tall jar filled with water at the bottom. To ultimately get to the water and drink it, the crow drops several stones, one by one. This is how starting a SIP works. You make tiny investments initially to gain a huge investment over time.

Benefits of a SIP

Doing a SIP has multiple benefits:

  1. It teaches financial discipline. You can do a SIP regularly over a long period of time.
  2. SIP reduces the average cost of your investment. Doing a regular SIP over a long period reduces the weighted average cost of your investment. This technique is called rupee cost averaging. When you make a lump-sum investment, you invest at the market NAV. With every SIP you do, you buy mutual fund units at lower and higher NAVs. This method brings the average cost down.
  3. SIP returns make you understand investments better. Suppose your fund is not performing well. You can always switch investments to another fund that performs better.
  4. By doing SIPs, you can choose the best investment options. Your risk-return profile defines these options.
  5. SIP returns use the principle of compounding returns. It helps your investments grow at a faster pace than inflation.

Most of us have a habit of investing in mutual funds or the stock market. The best way to increase your long-term wealth is to develop a SIP habit. It is better to begin a SIP when you are younger. SIP investments are intended to be made over a longer period of time. Your wealth increases as a result of compounding. Before picking your investment, please visit a financial advisor. Use a SIP calculator on any broker’s website before performing a SIP. It is basic, straightforward, and simple to use, as was already noted.

*Please note that the formula for calculating a SIP may show as plagiarism as it is a generic formula present on many websites.