1 What is the function of a SIP Calculator?

A SIP Calculator is a digital tool designed to forecast the potential return on investments made via Systematic Investment Plans (SIPs) in mutual funds. It's a popular tool among young investors interested in mutual funds. The calculator gives users an estimation of their returns, though actual returns can vary based on several factors. The tool doesn't consider exit load and expense ratio. Essentially, it helps you compute the SIP amount required to reach your financial objectives, using a projected annual return.

2. How does a SIP Calculator operate?

The operation of a SIP calculator is primarily based on user input. Users need to input their investment amount, investment frequency, investment duration, and anticipated returns. The calculator is structured on the principle of compound interest, which significantly contributes to mutual fund returns. For instance, the ClearTax SIP Calculator can compare returns from mutual funds and fixed deposits.

You can understand the workings of a SIP calculator with this formula.

FV = P [ (1+i)^n-1 ] * (1+i)/iFV = Future value or the amount you get at maturity.
P = Amount you invest through SIP
i = Compounded rate of return
n = Investment duration in months
r = Expected rate of return
Take an example where you invest Rs 2,000 per month for a tenure of 24 months.
You expect a 12% annual rate of return (r).
You have i = r/100/12 or 0.01.
FV = 2000 * [(1+0.01) ^24 - 1] * (1+0.01)/0.01
You get Rs 54,486 at maturity.

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