Most mutual fund investors prefer contributing a fixed sum of money into mutual fund schemes through monthly, quarterly, or annual SIPs. SIP calculators offer a handy way to help investors ascertain how their monthly contributions will grow over a set period of time. These calculators help investors understand the future value of their mutual fund investments, estimate potential returns, and plan investments more effectively.
If you are a potential investor, you can use an SIP calculator tool to fine-tune your investment strategy. Since SIP calculators are available online free-of-cost, you can easily use them to calculate investment growth over time. This article outlines a step-by-step guide on how to use an SIP calculator effectively.
Steps to using an SIP calculator
Using an SIP calculator is as simple as shopping at an online marketplace. Here’s a quick step-by-step guide that explains the process:
Step 1: Define your financial goals
Before you use an SIP calculator, you must define your financial objectives to set a clear target. This means identifying why you want to start the SIP. Whether you wish to save for your dream home, secure your child’s education, or plan retirement, setting clear, time-bound goals will help you use the SIP calculator effectively and ensure your investment aligns with your needs.
Step 2: Choose a reliable SIP calculator
Various mutual fund house websites, banks, NBFCs, and aggregator sites have SIP calculators listed online for easy accessibility. When choosing the right calculator, the goal is to select a reliable and user-friendly SIP calculator from a trusted financial institution. Remember that a good calculator will allow you to input investment parameters with ease and also provide accurate results with graphical representation of the total invested amount, gains made, and total wealth accumulated.
Step 3: Enter the amount you wish to invest
Once you select the right SIP calculator tool, enter the amount you wish to invest every month. Carefully assess your monthly income, expenses, and other liabilities like loan payments to understand how much you can contribute without overburdening your finances. Ensure that the amount fits your budget to avoid missing contributions or stopping your SIP midway.
Step 4: Select the SIP duration
Fill in the tenure of your SIP. Determining how long you wish to stay invested depends on the time horizon of your goals. For instance, if you are starting the SIP for a short-term goal like planning a vacation, your SIP duration can range from 1-2 years. However, if the SIP is dedicated for a long-term goal like retirement, a longer duration of 5-7 years may be better. In simple words, your investment duration for the SIP should align with the time horizon of its corresponding investment goal.
Step 5: Enter the expected rate of return
Next, select the expected rate of return for the investment. Remember that SIPs typically generate returns of around 10%-12% annually. Based on these average figures, you can estimate a realistic expected rate of return to accurately compute your potential earnings.
Step 6: Review the results
Once you enter these investment parameters, the SIP calculator tool will display your estimated wealth corpus with a break-up of the total amount invested and the interest earned.
Tips on using an SIP calculator effectively
Here are a few tips that will help you use an SIP calculator effectively:
- Some SIP calculators help you compute the right monthly investment amount based on the goal amount you wish to generate through your investment. If you are unsure about your monthly investment amount, you can use such calculators to determine the monthly investment you need to make to reach this target amount.
- If you wish to increase your monthly SIP amount annually, you should utilise a step-up SIP calculator to generate accurate return estimates. These calculators work in the same way, but include an additional field where you need to enter the amount or percentage by which you want to increase your SIP annually.
- To use an SIP calculator effectively for investment planning, remember to run multiple scenarios with tweaking the input parameters. This means increasing/decreasing the monthly investment amount, altering the investment tenure, and modifying the expected rate of return to see how your corpus value changes.
- While most SIP calculators allow you to compute returns based on monthly contributions, some even offer quarterly and annual options. If you wish to make SIP contributions quarterly or annually, remember to calculate estimates using an appropriate SIP calculator tool.
Conclusion
Using an SIP calculator is a simple process as long as you are aware of your financial goals and their corresponding time horizons. By simply entering the investment amount, your investment duration, and expected rate of return, you can easily review the total corpus and interest earned on the same. Moreover, the effective use of an SIP calculator allows you the flexibility to adjust variables like investment amount, duration, and return rate to strategically plan your investments.
