SIP Calculator
Nowadays, SIP is very common and favored in today’s generation. But what is this SIP? SIP is a way for investors to invest in Mutual funds, Stocks, Cryptos, etc. which gives good returns on a long-term basis. If you are an investor who invests in mutual funds, then there are two ways to invest in mutual funds Lump-sum and SIP. But today, we will mainly focus on the SIP Calculator , how it works, and its mathematical formulas.
What is an SIP Calculator?
A systematic Investment Plan (SIP) calculator is a handy tool that helps you estimate how much money you can make over a fixed period of time with a fixed amount of money.
It simply means it is a financial tool that can help you calculate the returns you may have earned on your SIP. In SIP, you can choose any date and amount. You can even stop and redeem it anytime.
In the SIP, an investor sets an amount that they want to invest. That amount will be deducted automatically from the investor's bank account monthly, which will be invested in the Mutual funds.
How does our SIP Calculator work?
In this, you need to provide certain data to the calculator such as monthly investment in which you can set the SIP amount on a monthly basis, time period which means the investment period, and expected return which means the expected rate of return.
And with this data, it gives out the total investment and returns, on investments you made over the period of time. A SIP plan calculator works on the given below formula,
M = P × ({[1 + i]^n – 1} / i) × (1 + i)
Where,
M = It is the amount which you receive upon the maturity
P = It is the amount that you invest at regular intervals
n = It is the number of payments that you have to make.
i = It is the periodic rate of interest in SIP
For example, assume that you are an investor, have an expected rate of return of 12%, and wish to invest for 10 years. Here are two scenarios:
- If you want to build a maturity corpus of rupees 50 lakhs, then you are required to invest around 6,500 rupees every month. In order to earn around rupees 3.82 lakh after it gets matures, you can invest a small amount of up to Rs 500.
- The second scenario is one of the easiest ways to find out how much you need to invest, stand to earn, and how long you need to invest. The easiest way to calculate all these values is an easy-to-use RWR sip calculator.
SIP Returns Mathematical Formula
As we mentioned before, how does an SIP calculator work? Here, we will provide you with an example of the sip calculator for your better understanding.
And how can we calculate the sip return with the help of a mathematical formula? Well, for calculating the sip returns, prominently there are only two formulas:
Future value formula (FV)
Let us assume that you are a fresh investor and you are carefully observing the sip mutual fund investments. Suppose you want to make a monthly investment of 3500 rupees for the next 12 months, and you have an expected return of 10%.
Through the help of the sip calculator, use the given below formula to generate your result:
Fv = p x ({[1+i]n - 1} / i) x (1 + i)
Where,
- fv = Future value earned upon maturity
- p = It is a fixed investment through sip
- i = It is a compounded interest rate
- n = It is an investment duration
Now, your monthly return is 10%, and the month is 12,
10%= 10/100=0.1
0.1/12
=0.008
Hence, your calculated amount is allowed to gain upon the maturity is:
fv= 3500 ({[1+ 0.008) 12 - 1} / 0.008) x (1 + 0.008)}
fv= 46000 rupees approximately in 12 months.
Extended Internal rate of return (XIRR)
It is also a mathematical formula used to measure the annualized return on investment, which involves the investment made and the return received at multiple times periods.
For example, you are an investor and invested rupees 7000 for 5 years. After 5 years, you have decided to redeem the investment amount, which is rupees 4,20,000. At an interest rate of 12%, the calculated return value will be rupees 1,57,405. The total value of one can except is rupees 5,77,000 approx. This resultant value is called the Internal Rate Of Return (IRR).
XIRR Formula in Excel
By using this hinder formula can be easily calculated by using Microsoft Excel.
XIRR Formula in Excel= XIRR(value, dates, guess)
Where,
- XIRR = Extended Internal Rate of Return
- Values = it represent the series of cash flows
- Dates = It represents the series of dates that correspond to the first and future investment dates.
- Guess = it is the initial guess or the estimated value of what the Internal Rate Of Return (IIR) will be.
Pitfalls of SIP Calculators
While making an investment in SIP, you must know the pitfalls of an SIP calculator to achieve your financial goals with confidence.
- It doesn’t consider volatility, which means that it knows how the future market will be, whether the interest rates will decrease or increase the calculator only calculates the given data.
- It doesn’t fetch real-time market data, which means that the real-time market data does not calculate. For example, the current interest is 7%, but we have to put 10% in the calculator. Here, we have assumed that the interest rate will be around 10% in the future. But in reality, it can be more or less than that.
- It is based on Historical data only, which means it will only show the returns that would have been received in the past for the same inputs. This is just an estimate, which means the calculation is not necessarily accurate, the returns can also be more and less depending upon the market behavior.
Final Thoughts
In summary, If you are making an investment decision, then it requires a great deal of patience and time to make it perfect. But now, here we have a SIP calculator that helps you to achieve your investment goal. So utilize them to take advantage to reap the fruit of investment management.
We hope, with the help of our article you gained some insight into what SIP is and how you can make use of the SIP calculator to make a decision on how much and when to invest in mutual funds. With the help of this, you can now make an estimate of what kind of interest you can expect and make appropriate financial decisions.