When it comes to mutual funds, a Systematic Investment Plan or SIP is a great tool that one can use for regular investing. The SIP calculator simplifies things and makes it easy for an investor to use. SIP calculator is hugely popular among investors because it is so simple and saves a lot of time.
Just enter the amount of money you want to invest each month, an expected percentage of return, and the number of years you want your money to be invested. The calculator tells you how much money should be put in each month to reach your target at the end of the term, whether it is one year or five years. That's pretty easy, right?
If you're an investor and want to know about the SIP Calculator, you've come to the right place. In this article, we are going to look at the SIP Calculator and see how it works!
A SIP calculator is used to compute the amount of money that needs to be deposited every month in order to accumulate a certain sum over a specific period of time. To do this, it takes into account three main factors:
Mutual fund companies make it easy for investors like you and me by providing a SIP calculator. This SIP calculator takes all three factors mentioned above into account and calculates the monthly investments required.
Understanding how SIP Calculator works is very simple. However, the application of this tool is a little more complex. For instance, you can use a SIP calculator for a large number of calculations. Let's look at some examples:
Let's say you want to invest Rs. 3000/month for 10 years with an expected return of 12% per year.
Now if you use a SIP calculator, you will simply have to enter the above 3 factors. The rest will be taken care of by the SIP calculator.
You will have invested Rs. 3,60,000
And you'll get a return of Rs. 3,37,017
So after 10 years, you'll receive Rs. 6,97,017
In case if you have a goal as you want to make Rs. 10,00,000 in 10 years with an expected return of 14%/year, SIP Calculator can tell you how much you have to invest each month to complete your goal.
In this particular case, you have to invest Rs. 5,705/month.
As you can see how SIP Calculator works, it is a very powerful tool. However, as with every other investment strategy, there are risks involved as well. So make sure you understand the various factors that affect your investments before using them to plan out your SIPs for mutual funds.
SIP Calculator returns are normally higher than what you would expect if you were to invest in a lump sum.
This is because the power of compounding helps your investment grow faster. When you invest money every month, the interest that accrues on your investments gets added into your account and compound within that particular fund. So the next month, you receive interest not only on your investments that were added last month but also on all previous investments.
Let's say you're investing Rs. 10,000/month into a mutual fund for 5 years with SIP.
After 5 years, you would have invested a total of Rs. 6,00,000 and received an average return of 12% per year.
Your final return would be Rs. 8,24,864.
Now let's say you want to invest Rs. 1,00,000 for 5 years with an expected return of 12% per year in a lump sum.
After 10 years, you will receive Rs.76,234 in returns
So you are going to receive Rs. 1,76,234 after 10 years.
As you can see a significant difference between these two investment plans. SIP uses compounding to its advantage and the returns are better than what you would receive if you were to invest in a lump sum.
It is important to factor in inflation when you're using SIP Calculator!
The reason for this is quite simple: Although your investments might grow, they can't keep up with inflation. This means that the money you will be needing in the future won't be able to buy as much as it does today.
This can be particularly dangerous for retired people who are living on their investments.
Inflation is the rate that indicates the rise in the prices of goods and services in an economy. Please check our Inflation Calculator for more details.
This means that when inflation rates are high, your savings will lose their value over time because you would need more money to buy the same goods. So in simple terms, you'll be able to afford less and less with the money you've saved.
However, with a little knowledge about how inflation works, you can figure out what you need to do in order to make sure your money will be able to buy the same amount of stuff 10 years from now.
Mohan has Rs. 5,00,000 in his retirement fund. Let’s say he retires at 60 years of age.
Mohan needs Rs. 3,00,000 to maintain his lifestyle by the time he is 70.
Let's say he buys 1-liter milk every day, which costs him Rs. 50/liter. So he is spending somewhere near Rs. 18,250/year on milk.
But next year the price of milk goes up by 10% due to inflation.
So in the second year, he will have to spend Rs. 20,075/year for milk.
It doesn't stop with milk! From groceries to clothes to shoes and many other things, all of them get expensive with time due to inflation.
So the key question here is how to invest for retirement so that you have enough money to buy the same amount of stuff?
The answer is quite simple!
Invest in a product that gives relatively better returns than inflation rates. Inflation rates are around 4%/year on average. So if you invest your money in a product that gives you returns of 5-6%, then you can be sure you'll have enough to take care of your needs 10 years down the line.
As you can see SIP gives you a clear advantage when it comes to inflation. If you're investing a certain amount every month in a SIP, by the end of 5 years, your money will have doubled due to returns and reinvesting.
With SIP you already know how much you need to invest and how much return you need to reach your investment goals. So if you invest what SIP says, inflation won't be that much of a problem.
SIP Calculator is quite useful in calculating returns on your investments. Even though it might seem like a lot of work at the beginning, you'll be able to make it a part of your daily routine with ease. In fact, if you invest regularly and keep reinvesting the returns every year, there won't be much left for you to do.
The one thing you should remember while using SIP Calculator is to make sure the inflation rates are accounted for. If you don't, you might end up with enough money but won't be able to buy as much as it does today!
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