SIP Calculators and How it Works
In the past decade, mutual funds have come to be one of the mainstream investment options in India, with the Mutual Funds Sahi Hai campaign picking up steam. As of October 31, 2020, the total number of mutual fund accounts in India stood at 9.37 crores, making it the 77th consecutive month to witness the rise in the count of Indian mutual fund folios. If you are to invest with a SIP, a SIP calculator is a must have to plan your investment. In this post, we discuss SIP calculators in detail, but let’s first see what a SIP is and why it’s an advantageous investment option for you, shall we?
SIPs are gradually becoming the preferred mode of investment for Indian investors, as shown by the fact that right alongside the number of total MF accounts, the number of SIP accounts in India continues to hike up. The total number of SIP accounts rose to 3.37 crores in October, as compared to the 3.33 crores of September 2020. SIP contributions, as of October, stood at INR 7,800 crores, as opposed to the INR 7,788 crores seen in September.
What's a SIP?
A SIP, or a Systematic Investment Plan, is one of the two ways you can go about investing in a mutual fund, the other being the lump sum investment method. While with a lump sum investment, you have to invest the total amount at once, a SIP allows you to invest a small sum every so often in your preferred mutual fund scheme.
When you start a mutual fund SIP investment, you allow an auto-debit of a fixed amount of money from your registered bank account at regular intervals (i.e., daily/weekly/monthly/quarterly) into the mutual fund of your choice. With your ability to choose your investment amount, tenure, and investment frequency, a systematic investment plan works as a flexible investment opportunity.
Why Should You opt for a SIP Investment?
There are some specific advantages to the SIP method, including:
Lower impact of market volatility: With the lump sum method, you make a one-time investment. So it’s obvious that market conditions at the time will leave a permanent effect on your returns, which may or may not prove to be profitable. But with a SIP, you invest a fixed sum at regular intervals regardless of market conditions. This is also known as rupee cost averaging approach since your costs are averaged over every investment. This naturally means you absorb relatively lesser risks from market volatility and get a comparatively higher return for a lower average price.
For example, assume that the Net Asset Value (NAV) for a mutual fund is ₹ 10. If you invest an amount of ₹ 500 in that mutual fund via a SIP, you’ll be allotted 10 units.
Now, if the NAV of the mutual fund decreases to ₹ 9, you would have the opportunity to pick up more units for the same amount of investment.
- There’s also a certain sense of flexibility associated with a SIP investment. If you have a regular income (i.e., monthly salary/pension), you can invest in a mutual fund without making a change in your usual lifestyle; you don’t have to curb your regular spending to invest a sizable amount of money at once.
As your investment generates returns over time, with a SIP, they get added to the original capital you’d invested, increasing the returns. This particular phenomenon is known as compounding.
For example, say you invest in a monthly SIP of Rs 100 to begin with and it generates 1% return in a month. In the next month, you would now generate returns on a principle of Rs 201 (Rs 100 being your new SIP amount, and Rs 101 being your previous principal and return). Similarly, in the third month, this amount would be Rs 303.01 (100 + 203.1)
Types of SIP investment:
There are several types of mutual fund SIPs available in the market right now, like:
- Top-up SIP: A top-up or step-up SIP investment automatically increases your investment amount by a certain percentage at predetermined intervals. For example, let’s assume you start investing with INR 1,000 SIP in a mutual fund scheme. With a top-up SIP, you can instruct the fund house to increase the SIP amount by INR 500 every six months. So after the first six months, your monthly SIP will rise to INR 1,500. In the thirteenth month, it will once again increase by INR 500 and become INR 2,000, and so forth.
- Perpetual SIP: With a perpetual SIP investment, there’s no fixed end date to your investment. Your periodic installments are deducted until you instruct for them to be stopped.
- Flexible SIP: As the title probably suggests, a flexible SIP investment allows you to increase or decrease your periodic investment amount as per your preferences and cash flow. For example, you may be asked a week before your SIP date whether you’d like to invest more (or less) than your fixed amount. For that particular deduction, your new preference shall apply.
- Trigger SIP: This type of mutual fund SIP is mostly used by experienced investors. It essentially lets you set a trigger so you can automatically redeem an MF scheme or shift from one plan to another if the market gets volatile. For instance, you can instruct your fund house to withdraw the SIP amount from your bank account and use it to purchase units of the MF scheme of your choice only if the NAV of the scheme falls to or below a specific level.
Suppose you invest INR 10,000 in an equity MF scheme and buy 1000 units in the NAV of INR 10. Let’s say you now choose a trigger SIP and request your fund house to switch your returns to an income MF scheme once your investment generates 20% returns. So now, whenever the NAV of your investment grows by 20% - i.e., if it reaches INR 12, INR 2000 would get automatically transferred to the income scheme you chose.
Alternatively, with a trigger SIP, you can also request a fund transfer if your investment falls to or below a particular level.
So now that you hopefully have a good idea of why a mutual fund SIP can be a beneficial investment for you, let’s take a look at what a SIP calculator is and why you should use one.
What's a SIP Calculator?
A SIP calculator is a tool you can use to figure out what sort of returns you might get on a mutual fund investment made through a SIP method.
Based on an expected annual return rate, a SIP calculator can give you an estimate of the returns you can anticipate from any of your periodic SIPs. However, keep in mind that the actual returns you’d receive might vary owing to several factors. For instance, a SIP calculator doesn’t account for any exit load (the fee charged for redeeming your holdings before a specific period) or expense ratio (the fund management fee, along with some additional costs).
How to Use a SIP Calculator
To use a SIP calculator, all you have to do is enter the following information:
- The fixed interval at which you want to make your investment
- The amount you’d be depositing periodically with the SIP
- The maturity period of your SIP
- The expected rate of return
Once you give the input, the SIP calculator will produce the estimated amount you’ll receive at the end of your investment.
How Does a SIP Calculator Work?
This is the formula a mutual fund SIP calculator uses to show you an estimated return amount:
FA = Future amount
P = The amount you invest at regular intervals through the SIP
i = Compounded rate of return
n = Your investment duration (in months)
Now, let’s take a look at an example:
Let’s assume you plan to invest Rs. 2000 every month for 24 months, and your expected annual rate of return is 12%.
So now we have i = 12%/12 = 0.01
Therefore, in this case,
FA = 2000 * [(1+0.01)24 -1] x (1+0.01)/0.01
FA = 2000 * [1.0124 -1] x1.01/0.01
FA = 2000* [1.0124 -1] x 101
FA = 54,486
The future value of your portfolio is therefore 54,486, and your returns are 54,486 - 48,000 = 6,486.
What are the Advantages of Using a SIP Calculator?
- Assuming that no external factors affect your return upon maturity, a SIP calculator can give you an estimation of the magnitude of returns you’ll get out of your SIP investment; since there’s no risk of human error.
- A SIP calculator lets you make more informed investment decisions since you can forecast your different investment plans and compare the outcomes.
- With a SIP calculator, you can also change the tenure or the investment amount to see how it impacts your SIP for maximized returns.
In conclusion, you should undoubtedly utilize a mutual fund SIP calculator to estimate the best possible profits out of your investment and put your future earnings to an advantage.