What is the use of SIP calculator?

It is advisable that you don’t spend all that you earn, because the inherent uncertainty of life makes it necessary for us to save and plan for hard times. But in terms of savings, it is not even enough to put your money in a mattress or bury it in your backyard. In fact, factoring in inflation, it is of paramount importance that individuals invest their money and make it grow overtime to act as a buffer during hard times.

Now there are many investment routes available to the individual investor. Some offer a fixed rate of return such as savings accounts, recurring deposits, fixed deposits, PPF, EPF and so on. Then there is the more advanced class of investment options, which are market-linked, i.e. their rate of return changes with the movement of the stock markets. This class of products includes mutual funds, New Pension Scheme, retirement funds, shares, bonds, debentures, etc. The problem in this regard is the fact that the future valuation these investments are a bit more difficult to estimate and one of the best tools to evaluate how much you can actually hope to get as a maturity amount down the line is termed as the SIP Calculator.

How a Systematic Investment Plan Works

Saving money does not come easily to everyone and some have to work hard to generate a lump sum that they can use to invest in a scheme of their choice. For such individuals interested in making mutual fund investments, the Systematic Investment Plan (SIP) offers a viable alternative. The principle of an SIP is similar to that of the old school recurring deposit i.e. the investment is deducted from the bank account of the investor every month and moved to a designated investment account. In case of an SIP, the only real difference is that instead of the money moving to a recurring deposit account, it is converted into mutual fund units of equivalent value, which are added to the investment account.

This system is great because it happens automatically i.e. an investor does not have to manually make each transaction. Hence the chances of missing the investment target or making a mistake at the time of investing are reduced. However, the key problem with the SIP system is the lack of control. This is because it is not possible to time your investments i.e. you cannot ensure that you purchase mutual fund units when the price is low when using an SIP. This may affect your returns in the long term.

The Workings of a SIP Calculator

As mentioned earlier, it is very necessary to gauge the future value of an investment and though markets cannot be predicted accurately, an SIP calculator can definitely help out in this case. For starters, thiscalculator uses a fixed rate model to calculate the compounded ROI amount every month when the SIP investment is made. Let’s use an example to illustrate this –

Individual SIP amount = Rs. 1000

SIP Tenure = 12 months

Rate of Return = 15%

Nominal (Monthly) rate of return = 15/12 = 1.25%

In the above example, the Rs. 1000 invested in the first month will be compounded 11 times at 1.25% each time, the Rs. 1000 invested in the second month will be compounded 10 times at 1.25% each time and so on till the Rs. 1000 invested in the 12th month, which won’t be compounded at all.

This will add up to an investment value of Rs. 13021 at the end of the year, which isn’t bad considering that you only invested Rs.12000 during the entire year.  

In case the above example is making your head spin, don’t worry because all of those calculations do not have to be done by hand anymore. The calculation can be completed in seconds using an SIP calculator. All you need to do is to input your key investment details such as the individual SIP amount, the expected ROI and the investment tenure. Then hit enter/calculate and receive the final result.