Smartest investment and life plans in UAE

SIP calculator: Benefits, Uses, how it works?

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  | Published: 03 December 2020 | Last Updated On: 23 December 2020

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Smartest investment and life plans in UAE

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Most of us want to invest but are often scared and confused. To many, investment seems extremely complicated, making them feel like they have to know so much before they plan to invest. As a result, a lot of us get rid of the idea of investing even before we start.

We complicate the process of investment by overthinking about where to invest? what is the best time to invest? how much should one invest as a beginner? or what will happen if we lose rather than gain by investing? The simple solution to these seemingly confusing questions is SIP or Systematic Investment Plan.

We are sure that even you have heard this term before. SIPs have been made popular over the past few years so much so that they are often thought to be synonymous with mutual funds, even though both are not the same. SIP is merely an instrument that enables you to regularly invest in mutual funds. It is a good way to spread out your investments in mutual fund schemes over a time period.

Even though there are many different ways of investing an amount in the markets, most investment advisors suggest that people do it through SIPs rather than making lumpsum investments as a beginner. So, let get started by first understanding what SIP is:

What is SIP?

SIP works on the principle of each drop counts in filling the bucket. Popularly known as SIP is the Systematic Investment Plan that allows individuals to invest a fixed sum of money, which can be as little as an amount of 500, in pre-decided periods of time into a mutual fund scheme on the basis of your choice. This automated method of making daily, weekly, monthly, or even quarterly investment makes the process hassle-free. Over time these little investments get you a great sum. Let’s take an example to understand this better- In case you have a wedding to plan or you want to buy your own house. Most people will choose to take a loan to fund these dreams because usually, we don’t have a lump sum amount to make such payments. The loan can be repaid in instalments that are composed of small amounts as opposed to the large loan amount. However, alongside paying the principal amount, you also have to pay interest on the principal.

If, however, you started a monthly SIP of an amount of 5,000 in mutual funds. This amount then will be automatically deducted from your bank account every month. This amount directly from your account will then be invested in the scheme on the pre-planned date.

SIP differs from a loan in that you don’t have to pay an additional amount as interest. By investing through Best SIP plans one can generate returns and save a large sum for future use.

What is a SIP Calculator?

The SIP Calculator is a stimulation that helps people to calculate an approximate amount of return one can expect from mutual fund investments made via SIP. It gives potential investors a kind of heads up on their investments in mutual funds. SIP calculators have grown hugely popular amongst the millennials who want to know what to expect before going down the rabbit hole!

It is important to remember that the actual return you get from investments in mutual fund schemes can differ depending on many different factors. Also, the SIP calculator does not take into account the exit load as well as any expense ratio that might be factored in. It is simply an online tool to arrive at the SIP amount in order to attain one’s financial goals on the basis of an expected amount of annual return.

How does the SIP calculator work?

The SIP calculator makes it efficient for investors to calculate their returns. All one needs to do is enter their data regarding the amount they wish to invest, the frequency of their investments, the time period for which they want to invest as well as the expected returns.

The SIP calculator is designed on the principles of compound interest. The compound interest generates mutual fund returns. To understand how the SIP calculator works, let us take a look at the formula:

FV= P [(1 + i) ^ n - 1] * (1 + i) / i

where FV is the amount or future value you get at maturity

P is the amount of money you invest through SIP

i is the compounded rate of return

n is the duration of investment in months

r is the expected rate of return in %

Let’s take an example to have a better understanding of how the SIP calculator works. Suppose you decide to invest 1,000 monthly over a period of 20 years. The amount you deposit in the scheme will be equal to 240,000 (1000* 12* 20). If the compound interest on this amount is calculated at 10 percent, the resulting amount will be 724,528.4 over a span of twenty years. Your total profit or return margin at the end of the tenure will be +66.87 percent.

On the other hand, if you choose to invest 1,000 per month and continue to increase this amount by 5,000 annually for a period of 20 years, you would have deposited a sum of 1,700,000. Adding the compound interest calculated at 10 percent for 20 years to this amount will result in a sum of 3,082,171.37. Your total profit or return margin at the end of the tenure will be +55.22 percent.

How to use a SIP calculator?

Using the Systematic Investment Plan calculator is easy. To have an idea of how much returns can be expected from your mutual fund investment through SIP, all you need to do is:

  • Choose the frequency of your SIP
  • Enter the sum you wish to invest in each SIP
  • Enter the time period of your SIP
  • Put the expected return rate

The SIP calculator will immediately do the calculations to display the sum accumulated at the end of the SIP duration.

Advantages of SIP:

There are several benefits responsible for the popularity of SIPs. Here are some of them-

  • Moderate Risk- A small investor with limited resources can take advantage of the time provided by investment through this method to gain above-average returns as opposed to conventional savings methods like a fixed deposit or recurring deposit, with limited exposure to risks. The diverse portfolio of the scheme dips only a portion of your earnings into the market, thus reducing the risk factor.
  • Long term gains- Building good returns by minimal investments spread over a long time period, make SIPs appealing.
  • Convenient- SIP authorizes banks to make the payments without the investor’s involvement every single time by giving the banks a “Mandate” to do so. 
  • Flexible- There is no lock-in period and the investor can even increase or decrease the amount as per their will.
  • Compounded benefits- The compound interest helps you achieve your long-term financial goals.
  • Regular Savings- As an investor, you make regular savings through SIP.

Benefits of the SIP Calculator:

  • The SIP calculator allows investors to get an estimate of returns one can expect from their mutual fund investments at the end of the tenure
  • The estimate allows the investor to strategize and plan their finances better
  • The estimation allows one to compare and choose the best mutual fund scheme for them
  • It not only gives an estimate of the returns but also the total investment as well as the future amount

These are the luxuries offered by the innovation of SIP calculators. Use it to make a strategic play in the mutual funds market.

The Bottom Line

SIPs have become everyone’s favourite method of investment in recent years. It is an easy way to invest and acquire your future financial goals without putting too much stress on you financially. It is that easy, efficient, and investor-friendly.