To see how the compounding effect of SIP’s work, check out our SIP calculator

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What is a Mutual Fund SIP Calculator?

If you’re new to Mutual Fund investing, the first question that you’ll ask is whether you should invest a lump sum or start a SIP (Systematic Investment Plan). If you decide on a latter, a Mutual Fund SIP Calculator can be extremely helpful.

A Mutual Fund SIP calculator is a simple, easy to use tool that can help you plan for your financial goals with the assistance of a Financial Advisor.

By allowing you to dynamically tweak various parameters such as CAGR, amount, tenure and step up, a Mutual Fund SIP calculator can help you create multiple hypothetical scenarios that you can use to achieve your financial goals, and eventually start with a plan that works best for you! Basically, a Mutual Fund SIP calculator allows you to create a customized goal based financial plan around your systematic investments.

How are SIP Returns Calculated

Many people who use a SIP calculator end up confused about how SIP returns are calculated in the first place! For example, your SIP calculator may be showing that by investing Rs. 10,000 a month for a year, you will end up with roughly 1.26 Lakhs at a 12% return. However, when you divide the profit (Rs. 6,000) by the principal (Rs. 1.2 Lakhs), the numbers don’t quite add up! Is the SIP calculator inaccurate? In fact, it’s 100% accurate!

The correct method of assessing returns from your SIP Calculator would be to consider the CAGR (Compound Annualized Growth rate) of each Mutual Fund SIP tranche in isolation, and then calculate the weighted average of these returns. Except - since a SIP Calculator considers equal-sized instalments, a weighted average calculation wouldn’t really be necessary – a simple average would suffice!

In the above case, we will take the weighted average of the annualized returns earned on each SIP tranche of Rs. 10,000 – which would give you 12%!

In doing so, you’ll be taking into account the fact that each tranche in the SIP calculator is, in effect, a different investment. By calculating the CAGR for each tranche, you’ll be condensing each tranche to a singular frame of reference, thereby eliminating the impact of the fact that each SIP instalment has a different investment time period.

Why use a SIP Calculator?

Let us understand the importance of a SIP Calculator with a simple example.

Rajat, a 30-year-old, decides to plan for his financial goals with the help of a Financial Advisor. He discovers that he requires a minimum of Rs. 5 Crores in 30 years’ time, in order to lead a comfortable post retirement life. Rajat’s monthly surplus is just Rs. 5,000 and he has never looked beyond fixed deposits, so the prospect of saving Rs. 5 Crores seems almost impossible for him – until, that is, he comes across the FinEdge SIP Calculator!

By increasing the target return in the SIP Calculator from 6% to 12%, Rajat discovers that his final corpus more than triples from 50 lakhs to 1.76 Crores. However, that’s still a huge shortfall from his target!

Now Rajat factors in an annual step up of Rs. 1,000 and also increases the target return in the SIP Calculator to 13%, meaning that he would have to invest in more aggressive Mutual Fund SIP’s such as Small Cap or Mid Cap Funds. Now, the SIP Calculator shows a projected corpus of Rs. 5.1 Crores! Rajat is relieved.

As you can see, a SIP Calculator helped Rajat decide on a concrete investment plan for his retirement.

What is Step Up in SIP Calculator…how does it help you?

Most SIP Calculators assume a static scenario that involves investing a fixed sum of money every month for several years. This can result in misleading outcomes!

After all, your income is bound to go up year on year, and so is your disposable surplus. If you have planned your cash flows smartly with the help of an investment advisor, it’s quite likely that you will be able to step up your SIP’s every year.

This is exactly where a step-up SIP Calculator comes in handy! By allowing you to visualize outcomes based on a fixed amount or percentage step up every year, a step-up SIP Calculator provides you with a much more accurate number when it comes to your projected goal achievement.

A step-up SIP calculator can prove especially efficient when planning for long term goals, in which even minor adjustments in the investment parameters can have a dramatic impact on the final corpus projection.

The best part is that at FinEdge, our technology allows you to build in automatic step ups into your financial plan right at the beginning; so that you don’t have to do it manually every year. This results in tremendous peace of mind with respect to your financial goals.

FinEdge has put more than 40,000 clients across 500 cities on track to meet their Financial Goals through the right Mutual Fund SIP investments. Get in touch with us to begin your journey to wealth creation today!

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