Systematic Investment Plan (SIP) Calculator – How Does A SIP Calculator Work

These days, most individual investors prefer the systematic investment plan (SIP) route for investing rather than lumpsum investments. This blog will focus on what is the systematic investment plan (SIP) calculator, and how does a SIP calculator work.

 

What is SIP?

A systematic investment plan (SIP) is a method of investing, usually in mutual fund schemes. In a SIP, an investor invests a fixed amount every month, on a specified date, in a specified mutual fund scheme, for a specified tenure.

 

For example, Ajay has started a monthly SIP of Rs. 2,000 in a Nifty 50 index fund for five years. The money is auto-debited from his bank account on the 1st of every month. In this case, the bank will transfer Rs. 2,000 every month to the mutual fund house. The fund house will credit an equivalent number of mutual fund scheme units to Ajay’s folio account.

 

What is a SIP calculator?

A SIP calculator tells the investor how much they will accumulate when they invest a specified amount every month for a specified period with an expected rate of return. For example, in the SIP calculator, Ajay will enter:

 

  1. Rs. 2,000 as the monthly investment amount
  2. Five years as the investment period
  3. 12% as the expected rate of return

 

The SIP calculator will do the calculation and return Rs. 1,62,207 as the answer. It is the amount that Ajay will accumulate in five years.

 

How does the SIP calculator work?

The SIP calculator works on the compounding formula in the background. It does the calculations based on the input parameters, which include the investment amount, the investment tenure, and the expected rate of return.

 

As seen in the above image, Ajay is investing Rs. 2,000 per month for five years (60 months) with an expected rate of return of 12% CAGR. In this case, Ajay will accumulate Rs. 1,62,207. Out of this, Rs. 1,20,000 is Ajay’s investment and the remaining Rs. 42,207 is the return earned by Ajay on his investment.

 

Using the Glide Invest SIP calculator

As an investor, you can use the Glide Invest SIP calculator and plan your financial goals. All you need to do is enter the three parameters:

 

  1. Investment amount

You can select whether you want to make a lumpsum investment or start a SIP with a monthly contribution. Most people prefer to invest monthly based on their monthly surplus that remains after deducting their monthly expenses from their monthly income.

 

You can also increase your monthly investment amount by a specified percentage annually. For example, Ajay starts with a monthly investment of Rs. 2,000 and plans to increase it by 10% every year. So, in the first year, Ajay’s SIP amount will be Rs. 2000 per month, the SIP amount will increase to Rs. 2,200 in the second year, in the third year, the SIP amount will increase to Rs. 2,400, and so on.

 

An important point to remember is: Other things being constant, the higher the amount you invest, the higher the corpus you will accumulate.

 

  1. Investment period

The investment period directly affects the corpus that you will accumulate. It is important to start your investments early on in your career, preferably from the time you start earning. You will have a higher risk appetite and have a long investment time horizon when you start early. In the long run, you benefit from the power of compounding and creating wealth for yourself. A long investment horizon helps you meet your investment goals with a small investment amount.

 

An important point to remember is: Other things being constant, the higher your investment time horizon, the higher the corpus you will accumulate.

 

  1. Expected rate of return

The expected rate of return depends on the choice of investment product. If you choose to invest in equity mutual funds, they have the potential to give you inflation-beating high returns. But, equity mutual funds come with a higher risk.

 

If you choose to invest in hybrid mutual funds, they will give you moderate returns. They are ideal for investors with a moderate risk profile. And finally, if you choose to invest in debt mutual funds, you will have to be content with moderate to low returns. The returns may or may not be able to beat inflation. If the returns are not able to beat inflation, the real returns will be negative. It means your money is losing purchasing power.

 

So, your expected rate of return will depend on the choice of investment product, which, in turn, will depend on your risk profile. Your risk profile is influenced by factors such as your age, risk tolerance levels, time left to achieve financial goals, your existing financial liabilities (home loans and other loans), and financial responsibilities (money to be accumulated for financial goals such as a child’s higher education, own retirement, etc.).

 

Ideally, you should start investing early in your career when your risk appetite is high, enabling you to invest in equity mutual funds where the expected rate of return is higher than other financial products. An important point to remember is: Other things being constant, the higher the expected return rate, the higher the corpus you will accumulate.