Know How Returns Are Calculated in SIP

Mutual fund investors are often left confused about the kind of returns they should expect from their investments. It is natural for them to feel that way because, unlike fixed income instruments where the interest rates are predetermined, returns from mutual fund investors are not guaranteed. Although it is true that in the long run, mutual funds have outperformed all other conservative investment avenues one cannot ignore the fact that mutual fund investments are subject to market risks and that they do not promise any specific returns.

One of the most sought after investment methods for mutual funds is the Systematic Investment Plan (SIP) option. People know that there are two ways to invest in mutual funds, either by making a one time lumpsum investment or by investing via SIP. In fact, a lot of people mutual funds because they offer SIP option as not everyone has a large surplus to commence their investment journey.

A Systematic Investment Plan is an investment process that may happen monthly, weekly, annually, biannually, or quarterly. Most salaried individuals opt for the monthly SIP as this allows them to save and invest a fixed portion of their monthly income. In SIP, the investors fix on an amount that they invest at periodic intervals till their investment objective is accomplished. SIPs are highly flexible as one can start or stop their SIP investments at any given time and do not have to pay any cancellation fee for the same.

To calculate the total assumed returns from their mutual fund SIP investments, investors can take the help of the SIP calculator. A SIP calculator is a free online tool that can compute complex calculations in a jiffy, calculations that if a human had to with a pen and paper, it would take hours for them to derive results. Also, investors can use the SIP calculator by entering a few simple details.

There are two ways in which a basic SIP calculator works. Needless to say, the SIP calculators offered by AMCs, fund houses, and aggregators may vary in terms of their user interface but are more or less likely to offer almost similar features. 

  1. It can calculate the total value of your monthly SIP investments for a specific duration
  2. It can calculate the monthly SIP sum that one needs to invest regularly to achieve their corpus

How to calculate Mutual Fund returns using the SIP calculator?

  1. Say you are investing in Rs 15000 every month in a mutual fund scheme. You plan to invest this sum for 15 years. You want to know the alpha your investments can generate at the end of the investment horizon. You expect the mutual fund scheme to generate 10% average returns.

In the SIP calculator, enter –

SIP sum – Rs 15000

Investment horizon – 15 years

Expected Rate of Return – 10%

The SIP calculator results –

Total corpus achieved – Rs  62,68,864

Total investment – Rs 27,00,000

Total interest earned – Rs  35,68,864

  • You want to build a retirement corpus worth Rs 2 crores but aren’t sure how to invest in mutual funds regularly so that you can achieve this corpus. You have 20 years in hand before you retire. You assume the mutual fund to offer 10% interest rate.

In the SIP calculator, enter –

Total corpus to achieve – Rs 2 crores

Investment horizon – 20 years

Expected Rate of Return – 10%

The SIP calculator results –

You need to invest – Rs 26,120 monthly to achieve the desired corpus.