What is an SIP calculator and how does it work?


Systematic Investment Plans (SIPs) are a popular method of investing regularly in mutual funds to build wealth over the long term. SIP calculators are useful tools that allow investors to estimate the future value of investments made through SIPs. SIP calculators provide valuable indicative projections to aid financial planning for various goals. Read on to learn more about what an SIP calculator is, how it works, key benefits, effective usage, and more.

What is an SIP calculator?

Systematic investment plans allow investors to regularly invest a fixed sum in a mutual fund scheme over a set period of time and an SIP calculator is a tool that helps plan this. It estimates the future value of investments made through SIPs based on assumed inputs. It forecasts SIP returns by factoring in elements like investment amount, tenure, expected returns, and SIP frequency.

SIP calculators are easily available online and offered by various financial services platforms. They serve as a starting point for investors to plan their goals using SIP mutual fund investments.

How does an SIP calculator work?

The SIP amount refers to the periodic investment amount to be made, usually monthly. The SIP tenure refers to the total duration for which the SIP will continue. The expected returns are the projected annual returns percentage for the investment. The SIP frequency denotes how often the periodic investments will be made – monthly, quarterly, semi-annually, etc.

Based on these inputs, the SIP calculator projects the future accumulated corpus using factors like the periodic SIP contribution amount, compounding effect of periodic investments, projected market returns over the long term, and reinvestment of interim cash flows like dividends.

The final output estimate helps assess the feasibility of financial goals and shows how regular investments, even of small amounts, through SIPs can accumulate wealth over time.

Key benefits of using an SIP calculator

An SIP calculator provides an indicative future value to aid financial planning and goal setting. It allows testing different combinations of parameters like amount, tenure, and returns. It motivates higher and more disciplined investments to achieve the required corpus. It also illustrates the benefits of starting early due to compounding over time. It quantifies the premium of long-term investing compared to traditional savings. Easy-to-use online SIP calculators are available for free on various platforms like the websites of mutual fund houses.

How to use an SIP calculator effectively?

Identify the financial goal you want to achieve using SIPs. Input a reasonable expected rate of return based on past performance. Use an SIP amount that can be regularly funded from your income. Give a longer time horizon to benefit from compounding. Assume conservative returns and increase the SIP amount for a better safety margin. Account for inflation to estimate the future value of money in current terms. Review and revise the plan annually based on actual performance.

Factors impacting SIP returns

SIP calculators help provide indicative projections to aid financial planning using systematic investments. However, the actual performance depends on various dynamic factors. These include the performance of the mutual fund scheme chosen, volatility and interim market corrections, changes in the investment amount and tenure midway, the level of diversification across asset classes, the ability to remain invested without withdrawals, taxation based on the type of mutual fund, and the inflation level. SIP calculators serve as a good starting point for SIP mutual fund investment planning and should be used before making investment decisions.

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