Know how SIP investment returns are calculated

There is a lot of fuzz surrounding SIP investments and a lot of people are confused because they do not know exactly what to do with all the information that is circulating through various modes of communication. The truth is that SIP is a great way to save and invest a fixed sum regularly in a mutual fund scheme. Mutual funds are a great investment vehicle to create long term wealth and one can start their investment journey in mutual funds via SIP. Why SIP? Because in the long haul, SIP has the power to convert one’s small investments into a commendable corpus.

And one way to ensure that your SIP investments are in sync with your financial goals is by using the SIP calculator.

How is the SIP calculator useful?

Online SIP calculator is an easy-to-use tool that lets investor determine their future returns which their SIP investments might be able to fetch over a certain duration. There is also a lump sum calculator for those who want to calculate their future mutual fund returns made through lumpsum investing but SIP investing is much better as one does not need to have a large sum as principal capital for starting their investment journey. To get a rough estimate on the returns which individuals can earn through SIP, mutual fund investors can use the SIP calculator.

However, the SIP calculator does not take several factors like exit load and expense ratio into consideration while computing results.

The SIP calculator is grounded on the following formula –

M = P × ({[1 + i]n – 1} / i) × (1 + i)

In the above stated formula –

‘M’ stands for the amount you receive upon maturity

‘P’ stands for the amount you invest at regular intervals

‘n’ is the number of payments you have made

‘i’ represents the periodic rate of interest

Calculating returns with SIP calculator

There are two different ways in which a SIP calculator can work. This may vary depending on which SIP calculator you use. Of course, all SIP calculators serve the same purpose but might be designed by AMCs in a slightly different way from one other.

If you know what your ultimate financial goal is, all you have to do is –

  • Enter the corpus that you want to achieve e.g. Rs. 50 lakhs, Rs. 1 crore, etc
  • Enter the expected rate of return i.e. the CAGR of the scheme, e.g. 8%, 10%, etc.
  • Enter the investment horizon i.e. by when you need the above mentioned corpus. Depending on the calculator you may have to enter this in either years or months

The SIP calculator will compute and display –

  • Total amount invested
  • Targeted amount (total investment sum + interest earned)
  • Monthly SIP sum that one needs to invest to achieve the desired financial goal

This is one way to use the SIP calculator. Another way to use the calculator is to find out how much your current monthly SIP investments can fetch in the long run.

To use the SIP calculator this way –

  • How much you are investing in mutual funds via SIP every month or how much you want to invest every month
  • Then enter the number of years / months you wish to continue investing this sum
  • Enter the expected rate of return

The calculator will display –

  • Total amount invested
  • Total wealth created

Investors are free to change the monthly SIP investment sum, expected rate of return, and investment horizon so that the calculator can compute and display various results. This might allow the investor to plan his / her mutual fund investments in a better way.