How does an SIP calculator work and how can it help evaluate a mutual fund scheme?

how to evaluate mutual fund using sip calculator
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Choosing from the several mutual fund schemes available in India can be overwhelming. However, it is always wise to carefully evaluate the numbers, so as not to be misled. Thankfully, the SIP calculator can serve as your guide and compass in your investment journey.

Read on to find out more about using SIP calculators and learn how to calculate mutual fund performance using SIP calculator.

  • Table of contents
  1. What is an SIP calculator?
  2. How does SIP calculators work?
  3. A word of caution
  4. How to evaluate a mutual fund scheme using an SIP calculator?
  5. Things to note while using SIP calculator
  6. FAQ

What is an SIP calculator?

Systematic Investment Plan (SIP) calculators are financial modeling tools that project the potential growth of regular investments in mutual funds over time. By leveraging compound interest calculations, these calculators can forecast the future values of investments based on inputs such as principal amount, timeline, and assumed rate of return.

Thus, SIP calculators aim to assist investors in financial planning by providing a simulation of the expected returns.

How does SIP calculators work?

Let's take an example of Raj who wants to invest Rs. 5,000 every month in an equity mutual fund through a SIP. The fund he has chosen has historically given 12% annual returns on average.

Raj's investment horizon is 10 years, so he plans to make 120 monthly investments in total. The SIP calculator will take Raj's monthly investment amount (Rs. 5,000), the expected annual return percentage (12%), total years of investment (10), and calculate the estimated future value using the formula for compound interest.

  • In the first month, Raj invests Rs. 5,000 and earns a return of 12% on this or Rs. 600 (5,000 x 0.12). So, at the end of the first month, his investment is worth Rs. 5,600.
  • In the second month, Raj again invests Rs. 5,000. Now his total investment amount is Rs. 10,600 on which he earns a return of 12% or Rs. 1,272. Thus, at the end of the second month, his investment is worth Rs. 11,872.

This compounding effect continues every month for the next 120 months. By the end of 10 years, Raj's total accumulated investment corpus would be approximately Rs. 9.12 lakh. (For illustrative purpose only)

A word of caution

It is important to note that mutual fund returns can be unpredictable and past performance does not guarantee future results. The results provided by an SIP calculator are hypothetical in nature and solely for informational and planning purposes. They do not reflect the actual performance of any specific investment.

In reality,mutual fund returns may fluctuate based on market conditions and the performance of underlying securities within the funds.

How to evaluate a mutual fund scheme using an SIP calculator?

As a first step, review the historical returns of the mutual fund scheme you wish to check out using an SIP calculator. Funds with good returns over long periods tend to have relatively higher levels of risk. While past performance is no guarantee of future returns, it can provide insights into how volatile or stable the fund's returns have been.

Next, analyze the mutual fund's underlying holdings - the asset allocation between equities, debt, cash etc. Funds investing predominantly in equities tend to carry relatively higher risk but also the potential for reasonable returns over the long time.

Conservative hybrid funds with a balanced equity-debt mix are associated with relatively lower risk as compared with pure equity funds. You can also compare the standard deviation of returns over a 5- or 10-year period. Higher standard deviation indicates greater volatility and probability of extreme returns on either side. More volatile funds are considered riskier.

Using these parameters, input a reasonable expected return in the SIP calculator. Be conservative in your return assumptions – anywhere from 8-12% for equity funds, and 6-8% for hybrid and debt funds. See how monthly SIPs can grow using your expected returns minus 1-2% to account for volatility.

Finally, use the results from SIP calculators only as a general estimate, not an exact forecast. Evaluate your risk appetite, investment goals, and time horizon before choosing SIPs in mutual funds with an appropriate risk-return profile. Modify expectations if needed.

Things to note while using SIP calculator

  • SIP calculators provide estimated future values based on assumed returns. Actual returns can vary.
  • Use conservative, moderate, and aggressive return assumptions to see outcomes under different scenarios.
  • Reduce estimated returns by the expected inflation rate for a more realistic picture.
  • Compounding has more time to work its magic with longer investment tenures of 10-20 years.
  • Calculators assume you will systematically invest a fixed amount on time every month or year.
  • Calculators do not account for taxes on gains that can impact net returns.
  • Expense ratios and loads charged by funds can reduce net returns.
  • Use calculators as a starting point. Do your own additional research before investing in SIPs.

Conclusion

Stepping into the professional world opens up numerous possibilities, both in terms of your career and your future financial prospects. How new employees approach savings and investments in their initial working years can shape their financial future. By understanding the importance of retirement planning, creating an emergency fund, mutual fund investments, and various tax-saving measures – new employees can give themselves a head start on the path to financial stability. However, it is always recommended to consult a financial advisor before making any investment decisions.

FAQs:

Is a mutual fund SIP calculator accurate?
While an SIP calculator provides estimates based on inputs, the actual returns may vary. It's a useful starting point, but market fluctuations and fund performance can impact actual results.

How can an SIP calculator enhance my investment strategy?
Using an SIP calculator can help you to create a more informed investment strategy by allowing you to experiment with different investment amounts, durations, and growth rates.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.