Many investors prefer a disciplined approach to investing, where small, manageable amounts are invested regularly, often automatically, to build wealth over time. They seek consistency, long-term growth, and a method that minimises the risk of market volatility. A Systematic Investment Plan (SIP) addresses all these needs.
An SIP lets you invest a fixed amount in a mutual fund scheme regularly and offers a structured and hassle-free approach to investing. But how do you know what your investments will yield over time? This is where a SIP calculator becomes useful. It’s a digital tool that helps you visualise the growth of your SIP over time with three basic details, i.e., the monthly investment amount, expected annual return rate, and investment tenure.
Learn below how you can make the best use of an SIP calculator to strategically plan your investments and maximise your returns.
Start with realistic inputs
Select an investment amount that you can comfortably contribute on a regular basis without impacting your other financial commitments. The expected return rate should be based on historical data of the mutual fund or the category of funds you are investing in. It’s also crucial to choose a reasonable tenure that aligns with your financial goals, whether it’s saving for your kid’s education, buying a house, or planning for retirement.
Deciding on a practical amount and investment duration reduces the risk of early withdrawals and the resulting losses or penalties.
Experiment with different scenarios
One of the benefits of an SIP calculator is the ability to experiment with different scenarios. You can easily adjust the investment amount, the rate of return, or the tenure to see how these changes affect the final outcome. This feature allows you to plan under different market phases and helps you create a strong investment strategy.
Understand the impact of delays
The sooner you begin investing in SIPs, the more you benefit from the power of compounding. An SIP calculator can show the impact of delaying your investments by even a few years. For instance, if you start a monthly SIP of ₹5,000 at an expected annual return of 12%, investing for 25 years would yield approximately ₹80 lakh in returns. Delaying this start by two years reduces the total returns to about ₹60 lakh, resulting in a huge difference of nearly ₹20 lakh.
Understanding this is highly useful for investors who might be tempted to postpone their investment plans. Seeing the significant difference that early SIP investments can make could give you the encouragement needed to start investing sooner.
Adjust for inflation
While an SIP calculator offers insights into future returns, it does not automatically factor in inflation, which can impact your purchasing power over time.
To account for inflation in your investment calculations, subtract the expected average inflation rate from your anticipated return rate. For example, if you predict a 12% annual return on your SIP and expect inflation to average 4%, you should use an 8% adjusted rate for a more accurate estimation of your real investment growth.
This method can help you plan your mutual fund investments in a way that accounts for inflation and gives you an accurate idea of how much corpus you need to save to meet your long-term goals.
Key takeaways
A systematic investment plan calculator is a useful tool that helps you estimate the potential SIP returns based on certain factors. When used correctly, you can use the calculator to set realistic financial goals and confidently invest in SIPs. Just make sure to input accurate data, experiment with multiple scenarios, manually adjust for inflation, and regularly review your investment plan to stay on track.
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