Parameters used in the SIP Calculator

What is the total number of years?

This is the tenure for the Mutual Fund SIP. The number of years you want to invest through SIP. If you choose 2 years in SIP calculator – it means you will invest a certain amount every month for 2 years.

What is monthly investment amount?

This is the amount that is to be invested every month. If a SIP of say Rs 10,000 per month is set, then the calculator assumes that every month a total of Rs 10,000 will be invested in these Mutual funds(s).

What are average returns (annualized)?

Average Returns are the return that is expecting from the investment every year. It is impossible to know what the exact return will be, but the historical returns percentage may be used as a reference. The number may be moved up or down to check the total value in different scenarios. For the benchmark, a Fixed Deposit would give a ~6.5% annual returns.

A Systematic Investment Plan is the best method of investing where an investor invests a specific sum of money at regular intervals (monthly or quarterly) in mutual funds as opposed to a lump sum. SIP mainly helps you in two ways:

Rupee Cost Averaging

This term refers to the process of investing frequently without relying on the process of timing the market. This removes the need to guess the right timing and invest when the markets are low and sell when the market prices are high. Rupee-cost averaging is all about investing a certain amount of money without any relevance to the current market conditions.
By using this technique, investors can offset the chances of a risk although they may not be able to avoid risks completely. For example, you invest INR. 500 every month in a SIP plan. You will be able to buy 20 units of a fund when the unit price is INR. 25 but when the price falls to INR. 20 in the next month you will be able to add 25 units of the same fund to your account. You would have paid an average cost of 22.5 for the 45 units.
This benefits you from overpaying for the funds when the markets are high because you invest a fixed amount every month. So if the market prices are high then the total number of units bought that month will automatically be low. This is what rupee-cost averaging is.

Compounding

Compounding is the term used for the method through which interest is calculated on SIPs which leads to a substantial amount of savings after a period of time. A person begins INR. 1000 a month at the age of 20. At the end of 30 years, when he turns 50, he will have accumulated a total sum of 35 lakhs compounded at 12% per annum. The word compounded here means that every year, interest was calculated for the total amount of money accumulated by the end of that year which includes the principle and the interest. Hence the compound amount of the principle and the interest grows at 12% per annum.

If the same person had started investing 5 years later, when he was 25, then by the time he turned 50 he would have a total sum of 16 lakhs compounded at the same rate of 12% per annum. The interesting part here is that the difference in the investment is 5 years’ worth of investment which comes to 60,000 but the amount gained at the end of the investment has a difference of a whopping 14 lakhs.

Since interest continues to get added to the principle, compounding usually generates better results over a long period of time. This also entails the fact the investments should begin at an early age. It helps the person save more over a certain number of years. Since most companies in India have a retirement age of around 60, you would want to be able to save up through SIP by this time through a good SIP scheme. The early you begin, the more you will be able to save for retirement.

Important note: It must be noted that any amount in future would be of less value as inflation would act upon the same.

Groww simplifies the method to choose and invest in an apt Systematic Investment Plan that suits your needs.

Explore portfolios and use the SIP calculator to estimate the final amount you can make.