What is SIP?
A Systematic Investment Plan (SIP) is a method of investing in mutual funds, where a fixed amount is invested at regular intervals, typically monthly, weekly, or even daily.
For example, if you wish to invest ₹1,000 every month in an SBI mutual fund, instead of doing it manually each time, you can start a monthly SIP of ₹1,000. Then, on a predetermined date (say, the 5th of every month), ₹1,000 will be automatically deducted from your bank account and invested in the chosen SBI mutual fund.
What is SIP Calculator?
The SIP calculator is an online tool that helps you calculate the future value of your SIP investments. You simply need to enter details such as the SIP amount, investment duration, and expected rate of return. The calculator will then display the total amount invested, the estimated future value of your investment, and the total gains.
Let’s continue with the earlier example.
So, you started a SIP of ₹1,000 in an SBI mutual fund and plan to continue it for 20 years. Now, you want to know what the final value of your investment would be at the end of those 20 years. This is where the SIP calculator becomes useful.
You open the Indmoney SIP calculator, enter the SIP amount (₹1,000), the tenure (20 years), and the expected return. The calculator then runs the numbers and shows you details such as the total amount invested, the returns earned during the period, and the final value at the end of 20 years.
The SIP calculator is also a great tool for goal-based planning, whether it's buying a house, funding your children’s education, or preparing for retirement. It can help you determine how much you need to invest each month based on your goal amount, time horizon, and expected return. We have covered this in detail in the upcoming section.
How to use SIP Calculator?
The SIP calculator is simple to use and convenient, even for those who are new to investing. There are two ways to use the SIP return calculator:
To calculate the future value of SIP
If you want to calculate the future value of a given SIP amount, you should use this option. In this option, you can provide the following inputs:
- SIP Investment Amount: This is the fixed SIP amount you want to invest at regular intervals
- SIP Frequency: This can be daily, weekly, monthly, or quarterly
- Investment Duration: The duration in years for which you plan to continue your SIP
- Expected Returns: This is the expected rate of return on your investment
Once you follow the above steps, an SIP calculator shows you the total amount invested, the estimated future value of your investment, and total gains.
To calculate the Target SIP based on the Goal Amount
If you want to calculate the SIP amount required to reach a future financial goal amount, you should use this option. In this option, you can provide the following inputs:
- Goal Amount: This is the target amount you want to achieve
- SIP Frequency: This can be daily, weekly, monthly, or quarterly
- Investment Duration: The duration in years for which you plan to continue your SIP
- Expected Returns: This is the expected rate of return on your investment.
Once you follow the above steps, the SIP calculator shows you the SIP amount required to achieve your future financial goal in your defined investment duration. This can be very helpful for you when planning your future financial life goals.
The SIP based on goal amount is a very useful feature if you are working toward a specific goal, for example, buying a house, a car or planning for a world tour.
How does SIP Calculator work?
An SIP calculator uses the following formula to calculate the future value of your SIP investment, and also reverse engineers this formula for when you are calculating the SIP amount based on the goal amount or future value.
Future Value = SIP Amount × [((1 + i)^N - 1) / i] × (1 + i)
Where:
- N = Total number of SIP instalments
- i = Expected return
Let’s understand how the formula works with the help of an example. Mr Abhay invests ₹3,000 monthly in a mutual fund for 10 years, expecting a 12% return. The components of his investment would be as follows:
- SIP Amount: ₹3000
- SIP Frequency: Monthly
- Expected Return (Per Year): 12%
- Investment Duration: 10 Years
Future Value = 3000 × [((1 + 0.0095)^120) - 1) / 0.0095] × (1 +0.0095)
In this example:
- Number of instalments = 120 (10 years * 12 months) SIP instalments
- 0.95% return rate per month equals 12% per annum
The total amount Abhay invested over 10 years = ₹ 3000 × 120 = ₹3.60 Lakhs
Based on the SIP calculations, the estimated future value of his investment would be ₹6,72,107 or ₹6.72 lakh. This means Mr Abhay’s return on investment is ₹3.12 lakhs.
How to Select the Return on the SIP Calculator
Return is the trickiest part of using a SIP calculator, and no online calculator provides this information directly. That’s for a good reason: there is no fixed return on SIP investments. So, how do you select the right return rate? You can use the following points to make an informed estimate:
1. Types of Mutual Funds and Historical Returns
SIPs can be started in different types of mutual funds, broadly categorised as equity, debt, and balanced (hybrid) funds. Historically:
- Equity mutual funds have offered returns of around 12–14%,
- Debt mutual funds have returned around 7–8%, and
- Balanced funds have yielded about 9–11%.
These historical averages can serve as a rough proxy for expected returns.
2. Past Performance of the Fund
You can also look at the fund’s 3-year or 5-year CAGR (Compound Annual Growth Rate). This is another reasonable proxy for expected return. However, keep in mind:
- If the past period includes a bull market, the CAGR might be inflated.
- If it includes a bear market, the return may appear lower than usual.
Make suitable adjustments based on the market cycle during the selected period.
Note: Both of these methods rely on historical data. While past performance is not a guarantee of future results, these estimates can still help you set a realistic return figure when using a SIP calculator.
Advantages of Using the SIP Calculator
It is a crucial tool for financial planning, goal tracking, and making informed financial decisions. Let’s learn more about the advantages of the SIP calculator in detail:
Financial Planning: The SIP calculator can be a valuable financial planning tool, provided you know your monetary goals. You can use the tool to help you in selecting the optimal SIP, based on return expectation and time. You can also start different SIPs for different goals.
Comparison of Scenarios: You can compare different scenarios by changing factors like SIP amount, expected return, and investment frequency. You can see how a 1-2% change in return can affect your absolute return dramatically over the long term.
Informed Decision-Making: It can help investors to make informed decisions by providing a data-driven understanding of the potential outcomes of their investment choices.
Power of compounding: Albert Einstein called compounding the 8th wonder of the world, and well, it is. As more and more time passes, compounding does wonders for your investment, You can use the calculator above by changing the investment return, time, or both and see how compounding can do wonders when it works in your favour.
Achieving a Goal: Goal-based SIP calculator is one of the most used features in INDmoney. People are using it not just to calculate the initial SIP amount but also to adjust the SIP amount based on the progress they made toward the goal, and even change the investment plan based on changing market conditions.
