How to Calculate SIP Returns?

 

Calculating SIP (Systematic Investment Plan) returns involves understanding the future value of a series of regular investments made over time, considering the effect of compounding. The process can be broken down into a few simple steps:

Steps to Calculate SIP Returns: 

You Need to use the SIP calculator to calculate SIP returns. Please follow the steps.

1. Determine Key Inputs: Gather the essential inputs required for the calculation:

   • Monthly Investment Amount (P): The fixed amount you invest every month.
   • Investment Tenure (n): The total duration of the investment in months.
   • Expected Annual Return Rate (r): The rate of return you anticipate on your investment per annum.

2. Convert Annual Rate to Monthly Rate: Since SIP investments are made monthly, the annual rate of return needs to be converted to a monthly rate. $\text{Monthly Rate} = \frac{\text{Annual Rate}}{12}$

3. Apply the Future Value of SIP Formula: The formula to calculate the future value of an SIP investment considering compounding is: $A = P \times \left( \frac{(1 + r)^n - 1}{r} \right) \times (1 + r)$ Where:

   • $A$ is the amount at maturity.
   • $P$ is the monthly investment amount.
   • $r$ is the monthly rate of return (annual rate divided by 12).
   • $n$ is the total number of installments (months).

Example Calculation

Suppose you invest ₹5,000 monthly for 10 years with an expected annual return rate of 12%.

1. Monthly Investment (P): ₹5,000
2. Investment Tenure (n): 10 years = 120 months
3. Annual Return Rate (r): 12% per annum

Convert the annual return rate to a monthly rate: $r = \frac{12\%}{12} = 1\% \text{ or } 0.01$

Plug these values into the formula: $A = 5000 \times \left( \frac{(1 + 0.01)^{120} - 1}{0.01} \right) \times (1 + 0.01)$

Calculate the future value: $A = 5000 \times \left( \frac{(1.01)^{120} - 1}{0.01} \right) \times 1.01$ $A = 5000 \times 230.13 \times 1.01$ $A \approx ₹11,61,799$

So, the future value of your SIP investment would be approximately ₹11,61,799 after 10 years.

Conclusion

Calculating SIP returns involves understanding the impact of monthly investments and the power of compounding over time. By using the correct formula and understanding the inputs, investors can estimate the future value of their SIP investments, helping them plan and achieve their financial goals more effectively. Using online SIP calculators can simplify this process, providing quick and accurate estimates for better financial planning.