Mutual fund investments have become increasingly popular over the past few years, specifically among retail investors who aim to have a more disciplined way to accumulate wealth.
Among many ways to invest in a mutual fund, perhaps the most productive method is the Systematic Investment Plan or SIP. But how do you develop an idea of the investments and your returns? Well, SIP calculators are an invaluable tool when it comes to maximising the results from using SIPs. This article aims to explore the purpose and possible benefits of SIP calculators, their limitations, and methods of usage.
A SIP calculator is an online tool that enables investors to predict how much money they will have accumulated over the future by using SIP to invest in mutual funds. An investor puts such parameters as the amount of money entered into the account each month, period of investment, and possible return rate and gets a clear picture of how much the future wealth accumulation from the account can be.
The tool simplifies the whole process of investment and shows how minor regular contributions can lead to significant financial growth.
One of the primary roles of SIP calculators is to simplify the task of financial planning. All investors can set goals for their expenses, be it children's education, purchasing a home, or retirement and calculate the required investment per month.
Meanwhile, the EMI calculator perfectly explains the power of compounding. Compound interest refers to an increase that takes place when the returns you make on your investments start generating more returns. For instance, a customer who invests ₹5,000 monthly in a mutual fund with a return of 12% will earn much more in the future and receive impressive returns due to the compound effect. This also encourages investors to start early and stay consistent with their investments to get the maximum benefits.
The concept of rupee cost averaging is another significant plus of using SIP calculators. The price aspect changes constantly, but accordingly, an investor can make wise decisions when making purchases. They can buy more units if the cost is low and fewer when the cost is high on average. In such a case, the cost of the units is averaged and will not be affected by fluctuation greatly.
This is how you can use the SIP calculator -
1. Enter the amount you are looking to invest every month.
2. Enter the number of years for which you want to invest.
3. Enter the annual return rate you expect based on historical performance.
4. Click calculate, and the tool will project how much your investments will be worth in future.
For instance, if you plan to invest ₹10,000 monthly for 10 years and expect an annual return of 10%, the calculator will generate a projected amount you can accumulate by the end of the tenure.
Although SIP calculators are highly beneficial, there are certain limitations as well. These include:
• Market volatility: The projected returns are always based on the expected returns, and there is a possibility of a negative variance. Furthermore, past results can never be indicative of future performance.
• Fees and taxes not included: The calculator will always exclude the expense ratios, exit loads, other taxes and duties if applicable. The actual returns can be significantly lower than the projected amount.
• Assumption of consistency: The calculator will always assume that the investor will invest the amount of the sum for every month without fail.
SIP calculators are one of the most important tools associated with mutual fund investments. These calculators help investors simplify the investment process and estimate future gains at every step.
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