The need for a SIP calculator
While planning for long-term financial goals such as building a fund for a child’s higher education or their own retirement fund, an investor needs to know how much amount they will accumulate. A SIP calculator gives this information to the investor and helps them make an informed decision. This blog will focus on the advantages and disadvantages of using a SIP calculator for calculating returns.
What is a SIP calculator?
A SIP calculator helps an investor by calculating the amount they will accumulate at the end of the investment period. A SIP calculator needs inputs such as the monthly investment amount, the investment period in years, and the expected rate of return.
Advantages of a SIP calculator
Some of the advantages of a SIP calculator include the following:
1.Calculates the exact amount that will be accumulated
You need to input the monthly investment amount, the investment period in years, and the expected rate of return. The SIP calculator will calculate the exact amount you will accumulate at the end of the investment period based on the amount invested and the expected rate of return.
2.Gives a graphical representation of how the money will grow
The SIP calculator gives you a graphical representation of how your money will grow during the investment period. Some SIP calculators give you various graphs such as a line chart, bar chart, or pie chart with the details of the amount you will accumulate at the end of the investment period. Some SIP calculators also give you a tabular representation of how your money will grow.
3.Gives a break-up of the amount invested and returns earned on it
The SIP calculator gives you a break-up of the amount that you have invested from your pocket and the returns you have earned on it. It will show you how the power of compounding works in the long run.
4.Helps to work with various scenarios based on the expected rate of return
A SIP calculator helps you work with various scenarios based on the expected rate of return. For example, suppose an investor decides to invest in debt mutual funds with an expected rate of return of 8% CAGR. In that case, the SIP calculator will show how much money will be accumulated at the end of the investment period. If the amount accumulated is not enough, an investor can consider investing in hybrid mutual funds and enter the expected rate of return of 10% CAGR to see if the amount accumulated will be enough to meet the financial goal.
Similarly, for an investor with an aggressive risk profile, the SIP calculator can help work out various investment scenarios. For example, suppose an investor wishes to invest in large-cap equity mutual funds. In that case, they can enter the expected rate of return as 12% CAGR and see whether the accumulated amount will be enough to meet the financial goal. If not, they can rework the calculation by choosing to invest in mid-cap equity mutual funds and entering the expected rate of return as 14% CAGR to see if the accumulated amount is enough to meet the financial goal.
5.Helps in making informed investment decisions
Based on the amount shown in the calculator, you can assess whether the amount is sufficient to meet your financial goals. So, a SIP calculator helps make informed decisions while planning various financial goals, such as building a fund for a child’s higher education or own retirement fund.
6.Has user-friendly interface
A SIP calculator has a user-friendly interface. It is very easy and convenient to use. Anyone can use it. It gives accurate results. It is fast and gives results at the click of a button.
7.Available online and free to use
Many websites provide SIP calculators on their websites or mobile apps. These include websites of AMCs, intermediaries, personal finance websites, blogs, etc. The SIP calculators are free to use.
Disadvantages of a SIP calculator
While there are many advantages of a SIP calculator, there are a few disadvantages also.
1.It may make an investor take a higher risk
A SIP calculator shows the amount that an investor will accumulate at the end of the investment period. If the amount is insufficient to fulfill the financial goal, the investor may take a higher risk than their risk profile.
For example, an investor with a conservative risk profile wants to accumulate Rs. 22.40 lakhs in 10 years by investing in a debt mutual fund. If the investor’s expected rate of return is 8% CAGR, the investor will be able to accumulate only Rs. 18.12 lakhs. But, in the SIP calculator, if the investor changes the expected rate of return from 8% to 12% CAGR, the amount accumulated will be Rs. 22.40 lakhs. But, to achieve this, the investor with a conservative risk profile will have to take a higher risk and invest in equity mutual funds.
2.Discourage an investor
A SIP calculator shows the amount that an investor will accumulate at the end of the investment period. If the amount is insufficient to fulfill the financial goal, the investor may decide not to invest.
Let us continue with the example in the earlier point. The SIP calculator shows that an investor with a conservative risk will be able to accumulate only Rs. 18.12 lakhs (at an 8% expected rate of return). But, the investor wants to accumulate Rs. 22.40 lakhs. So, he/she may altogether drop the investment plan.
SIP calculator can help you achieve your financial goals
A SIP calculator can help you take the first and most important step toward achieving your financial goals. The SIP calculator tells you the amount you will accumulate, which will give you the confidence that your financial goal is within reach, and you can start investing.