Investing money for the future is crucial to meeting major financial goals like buying a house, children’s education, retirement etc. Systematic Investment Plans (SIPs) are a popular way to invest in mutual funds regularly to build a corpus over time. Choosing the right SIP scheme and investment amount can make a big difference in achieving future goals. This is where SIP calculators come in handy. They help estimate the future value of investments and plan SIPs accordingly.
Understanding SIP calculators
SIP calculators are online tools that help calculate the estimated future value of investments under an SIP. They take into account factors that are given below.
- SIP amount
- Investment tenure
- Expected annual returns
- Frequency of investment (monthly, quarterly etc.)
Based on these inputs, SIP calculator forecast the maturity amount. Some calculators also show the total investment amount and estimated gains.
How to use an SIP calculator effectively
Follow these steps to effectively use online SIP calculators.
- Define the financial goal – Make sure you have a clear goal in mind, like saving for retirement, child’s education or down payment for a house. This determines the target amount and investment horizon.
- Be realistic about returns – Have a reasonable assumption for expected annual returns. For equity funds, consider 10-12% annual returns in the long run. For debt funds, expect 6-8% yearly returns.
- Factor in inflation – Reduce the target amount’s future value by an average inflation rate like 6-7% yearly. This gives a more realistic figure to aim for.
- Try different scenarios – Use the SIP calculator to test different monthly SIP amounts and see the difference in maturity values. Evaluate which SIP fits your budget and needs.
- Review periodically – Revisit the SIP calculator every 6 months or annually to check if your corpus is growing as per projections. Modify the SIP amount if required.
Key benefits of using SIP calculators
SIP calculators are invaluable tools for retail investors looking to plan their investments systematically to meet various financial goals. These online calculators offer several benefits that help investors make informed decisions about SIPs.
- Planning specific goals: The primary benefit of SIP calculators is that they help estimate the investment required to achieve a specific financial goal. For instance, if you want to accumulate Rs 50 lakhs for your child’s higher education in 15 years, the calculator will tell you how much monthly SIP is needed for this target corpus. This goal-oriented approach helps plan SIPs in a focused manner.
- Testing SIP scenarios: SIP calculators allow you to input different monthly SIP amounts and investment horizons to see the impact on the maturity value. For example, you can check how much difference an SIP of Rs 5000 versus Rs 7000 per month makes to your retirement kitty over 20 years. This ability to test scenarios helps decide an optimal SIP amount that fits your budget and needs.
- Tracking existing investments: You can also use SIP calculators to assess if your existing SIPs are on course to reach your desired corpus. For instance, if you have been investing Rs 10000 monthly in an equity fund SIP for 7 years towards buying a house, you can validate if you need to top up your SIP amount based on the target amount. This helps ensure your SIPs stay aligned to goals.
- Power of compounding: One of the most important benefits of SIP calculators is that they demonstrate the power of compounding i.e. earning returns on reinvested returns. The maturity value projections account for the compounding effect over long periods, which helps drive home why starting early is a prudent decision.
Conclusion
Systematic investing helps overcome the pitfalls of market timing and builds discipline. SIP calculators are invaluable tools for retail investors to plan their investments wisely to achieve various financial goals. Used prudently, they can help chart a path to financial freedom through informed investing.
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