# What is a SIP Calculator? How Does it Work?

## What is a SIP calculator?

A Systematic Investment Plan (SIP) calculator is an online financial tool that can help an investor to calculate the returns he/ she would earn on his/her SIP investments. The calculator also tells an investor about how much an investor would need to invest every month to earn a target corpus. In simple words, it provides a blueprint to achieve various financial goals of the investor.

## How does the SIP calculator work?

You can use the calculator using either the investment amount approach or the target amount approach. Use the target amount approach if you have a target maturity amount to achieve.

• Input the amount you want to invest
• Decide the time period for which you want to invest the amount for
• Fill in the expected rate of return
• If you have already set a goal then input the same and follow the same process as mentioned above.

## Benefits of using SIP Calculator :

The benefits of the SIP calculator are as discussed below:

• Estimate maturity amount: The SIP calculator helps you evaluate prospective returns at the end of the investment duration. It also helps in evaluating the monthly investment amount you must invest today to achieve the target maturity amount at the end of the investment tenure.
• Easy to use:  SIP calculator can be used freely. You just need to enter the required details to calculate returns. Also, the calculator saves investors time from doing complex calculations. The calculator calculates the maturity amount and the monthly investment amount within seconds.
• Graphical and Tabular Representation: The calculator shows the return projections in graphical and tabulated forms. This helps investors to demonstrate the returns and make informed decisions easily.
• Maturity amount based on growth scenarios: This calculator evaluates the returns based on three growth scenarios which are based on above average, average, and below-average returns.
• Step Up: This calculator provides an opportunity for investors to step up their investments annually.

## How is SIP return calculated?

SIP return can be calculated using various return processes – absolute return, annualised returns, CAGR, and XIRR. However, CAGR is the most fruitful method to estimate SIP returns.

CAGR or Compound Annual Growth Rate is the rate at which an investment grows every year for the entire tenure of the investment. The formula of CAGR is represented below:

CAGR = (ending value/beginning value) ^ (1/number of years or months) – 1*100

Where the Ending value is the Net Asset Value at the time of withdrawal, and the Beginning value is the Net Asset Value at the time of investment.

The concept of calculating returns can be understood with the help of an example as discussed below:

Mr. A has invested INR 3,00,000 when the NAV is INR 20. At the time of redemption after seven years, the NAV is INR 50. Using the CAGR formula, we can estimate returns for Mr. A.

CAGR = (ending-value/beginning – value) ^ (1/number-of-years) – 1* 100

CAGR = (((50/20) ^ (1/7)) – 1) * 100

Compounded Annual Growth Rate = 13.99%

This means the investment has grown 13.99% each year for a tenure of 7 years.

CAGR = 13.98% ~ 14%

Hence the investment of INR 3,00,000 will grow to INR 7,50,000 in 7 years.

## Conclusion

Research and analysis are vital before making any investment decision. Also, one must estimate the potential returns before investing to dissect if the investment opportunity is worthwhile or not. Furthermore, it is requisite to make sure the financial objective of the investor and the investment objective of the asset are lined up. This empowers investors to choose the right asset that will help them realise their goals faster. Hence, use a SIP calculator and make a well-informed investment decision.