Calculating potential returns: A deep dive into how an SIP calculator functions

An SIP or Systematic Investment Plan is a popular investment strategy for mutual funds in India. It allows investors to invest small amounts regularly instead of a lumpsum. SIP calculators help investors

estimate potential returns from SIP investments over different time horizons. In this article, we will take a deep dive into how SIP calculators work and the various functions they provide.

Key components of an SIP calculator

All SIP calculators have certain core components that help calculate returns -

Investment amount: This is the amount invested through an SIP on a regular basis, usually monthly. The calculator allows you to specify the SIP amount.

Duration of SIP: This is the total number of years or months for which the SIP will be invested. Calculators allow you to select the duration, usually between 3 to 30 years.

Expected rate of return: This is the expected annualized percentage return from the mutual fund portfolio. Calculators generally provide a range to choose from like 12-15%.

Compounding frequency: SIP returns compound or grow over time. Calculators assume daily, monthly or annual compounding of returns. Daily compounding gives marginally higher returns.

Inflation rate: Some calculators allow factoring inflation which reduces the real returns. In India, an inflation rate of 6-7% is typically assumed.

Given these inputs, the calculator uses compound interest formulae to calculate the future value of SIP investments over time. Let's understand some other advanced functions.

Flexible inputs and outputs

Most SIP calculators provide flexibility in the input and output parameters:

● One can enter the SIP amount and duration, and the calculator provides the expected maturity value.

● One can enter the target amount like a child's college fees, and it will estimate the SIP amount and duration needed.

Advantages of using the SIP calculator

Estimate long term returns

SIP calculators let investors estimate potential returns over different long term periods between 5 to 30 years. This helps in understanding the power of compounding and staying invested in equity funds through market ups and downs.

Flexible goal planning

Users can specify target amounts like child's tuition fees and calculate monthly SIP amounts required. Or they can input SIP amounts and assess maturity values. This aids in linking investments to life goals.

Track multiple SIPs

A single tool to monitor and compare multiple ongoing SIPs based on different funds, amounts and durations helps maintain a clear investment overview.

Effortless usage

SIP calculators are easily accessible through websites or apps without lengthy calculations or financial

expertise. This spurs wider investor participation.

Make informed decisions

By providing clearer insight into long term wealth creation from SIPs under various assumptions, these tools facilitate better informed investment choices and expectations management.

Conclusion

SIP calculators are useful financial planning tools for Indian investors to estimate returns from regular mutual fund investments. Choosing the right calculator with advanced features helps one analyze

realistically by factoring taxes, inflation and various market scenarios. Used diligently along with disciplined investments, SIPs can help meet diverse long term goals like retirement, child's education or other life milestones

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