How does the SIP calculator work? All you need to know

In the earlier article, we discussed the Step-up SIP calculator. In this article, we will talk about the SIP calculator.

SIP stands for Systematic Investment Plan. It is a method of investing that requires consistency in investments, even if the amount is small. It focuses on time and needs the compounding cycle not to break.  

The amount invested in a SIP format allows the investor can take advantage of rupee cost averaging over the long term and thus, get better returns on average.  

Periodic investment also reduces volatility, and you can accumulate a sizeable corpus. SIPs usually allow you to invest weekly, quarterly or monthly.

What is a SIP calculator? 

A SIP calculator is a tool that will help you to get a basic idea about the returns that you can generate through your investments.  

It provides you with a rough estimate and a road ahead to achieve your financial goals based on a projected annual rate of return.

With the help of a few numerical inputs, a SIP calculator makes your work easier by solving complex financial problems in no time. The calculator will calculate the increase in wealth and the expected return for your SIP investment. 

How does a SIP calculator work? 

SIP calculator calculates the potential return with the help of the compound interest formula.  

The working formula is as follows: M = P x ({[1 + i] n – 1} / i) x (1 + i)

To calculate your SIP returns, you need to input the following values: 

  • Monthly investment amount (that you wish to invest consistently) 
  • Expected rate of return
  • The investment periods

The formula mentioned above has the following components 

M = Total Amount you will receive on maturity.  

P = Amount of money that you will invest periodically (at consistent time intervals)  

n = Number of payments you make as an investment  

i = Periodic expected rate of interest on your investment 

Let us see the working of the above formula through an example 

For example, you want to invest Rs 10,000 monthly for seven years with an expected rate of return equaling 12% per annum (so, the monthly return will be 12%/12 = 0.01). 

Plugging these values in the formula, we get M =10,000({[1+0.01] 

{84}-1}/0.01) x (1+0.01) = Rs. 13.19 lakhs.  

The best thing about this calculator is changing the variables’ values according to your investment goals and requirements.

SIP calculator
Source: Edufund

How will a SIP calculator help you?  

Trying to estimate what you wish to receive at the end of your investment tenure is an essential task. It depends upon how much return you expect on your investment and how much are you willing to invest. 

The SIP calculator helps you to 
  1. Get instant results about your investment scenario with a single click  
  1. It tells you the estimated potential returns  
  1. Allows you to compare various SIP options by varying the inputs in the formula 
  1. Assists you in making well-informed and calculative decisions regarding your investments  
  1. Free-of-cost calculation  

You can use a SIP calculator in multiple ways. It can be used backwards to obtain the periodic investment amount, given your final wealth requirement, investment period, and the expected return rate.

Thus, a SIP calculator is a helpful tool for taking your investment journey a step ahead.

Consult an expert advisor to get the right plan for you

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