March 24, 2020 Last updated April 1st, 2020 263 Reads share

Investing in Mutual Fund SIPs: A Detailed Walkthrough From Selecting Funds to Forecasting Returns

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Systematic Investment Plan, commonly known as SIP is a scheme offered by mutual funds to investors in which they can invest in a systematic manner. With SIP, one can invest a definite sum of money at regular and predefined intervals in a mutual fund scheme. The period of intervals ranges from yearly, semi-annually, monthly and even weekly. One can start with SIP with an investment as low as Rs. 500.

With the help of mutual fund SIP calculator, an individual can estimate the returns on his mutual fund investment. By using a mutual fund sip calculator, for instance, one can know the expected return on investment by entering details such as SIP amount, investment period, return percentage, etc.

Advantages of SIP

First, let’s convince you why you must invest in SIPs by presenting their benefits. There are numerous advantages of the SIP method of investment, which are:

Simple and Systematized Investment

As steps for starting SIP are quite easy, it is relatively preferable over other forms of investment. After having opted for SIP, a fixed amount is deducted from the investor’s account and get directly invested in the selected mutual scheme of the investor. It is totally hassle-free, and one can easily keep up with the discipline. All one needs is to have the requisite balance in their account prior to the date of the installment payment.

Market Timing

For every investor, the main problem of decision making is when to invest. The seeming volatility of the market refrains the investor from taking a step forward in investment. With SIP, this problem is somewhat mitigated. Since SIP is a periodic investment plan, it covers many market cycles. Although it is by no means free from the market volatility, the fact that it serves for the long run, helps SIP cope with many ups and downs.

Rupee Cost Averaging

To cope with the changing market, rupee cost averaging is a great benefit of having SIP. When the market is high, the investor can buy fewer units and when low, he can buy more units. In this way, an individual’s investment is balanced out or averaged without incurring too much loss. In fact, more often than not, it benefits the investor in the long run. It also encourages the investor to keep investing in a particular mutual fund scheme.

Power of Compounding

The benefit of investing early provides the benefit of the power of compounding. In compounding, the interest earned on the principal amount is reinvested along with the principal. The interest earned on this new amount is further reinvested and the process continues till the last date of the period of investment. This makes the total amount keep on increasing.

For instance, a monthly SIP amount of rupee 1000 for 30 years will bring the earning of rupee 30 lakhs on a 12% investment returns rate. This estimation was made with the help of a mutual fund sip calculator, and hence it is recommended to use a mutual fund sip calculator whilst calculating and estimating returns for different periods and investment return rates.

Things to Know About Before Starting SIP

It is equally important to be sure about why an investor opts for SIP. Many might take the decision to invest without giving it due consideration. To avoid this issue here are some of the things to be sure about before opting for SIP:

  • Deciding the objective of investment. One should be clear about the aim behind the investment. Without a prior aim, one might miss out on the necessary steps and opportunities he could otherwise have seized upon.
  • One should take into consideration the available duration of investment, risk management limit or capacity, and a few other such factors.
  • Those who are risk-averse should rather go for debt or balanced funds. Otherwise, if the duration of investment ranges over or around for 4-5 years then investing in mutual funds is more beneficial.
  • There are schemes that seem to serve best for specific individuals. This is because each person has a different set of goals and financial status. One should also assess his own ability to deposit the amount at regular intervals. Choosing the right scheme constitutes the consideration of these factors.

Guide to Selecting the Best SIP for You

Choosing the best kind of SIP is subjective and hence, varies from person to person. However, there are some general points to keep in mind before going for this option:

  • An investor must keep in mind that the mutual fund he has chosen should at least have been five years in the market.
  • The fund house an investor should opt for must-have assets estimated over 500 crores. Not that this would guarantee great returns, but they are way more reliable than others. Getting hold of one such fund house would be the most important step towards getting the most preferable mutual fund investment.
  • The mutual fund should be linked to the investor’s bank. This will keep the investment process smooth along with keeping both the parties up to date about the financial status of the investment.
  • Try getting a hand on those mutual funds which are highly rated by CRISIL.
  • Learn more about the fund’s past. Learn about the performance of the fund manager, the volatility of the firm and information related to the tax paid by the investors in the past.

How to Forecast Returns?

Using a mutual fund sip calculator helps in calculating and forecasting returns in investment. The sip calculator serves in determining the amount one wants to invest and the scheme which the individual should choose. Most importantly, the mutual fund sip calculator helps in giving an estimated value of the return from a particular investment scheme, hence enabling an investor to make an informed & calculated investment decision.

The mutual fund sip calculator is based on the formula of compound interest. SOURCE: thecalculatorsite.com

Users have to enter the amount of their investment, the intervals of deposits, the period of investment and the returns to be expected. The mutual fund sip calculator is a tool that is based on the formula of compound interest.

Formula for calculating returns is M = P × ({[1 + i]n – 1} / i) × (1 + i)

Where,

M is the amount to be received upon maturity.

P, the amount invested at regular intervals.

n is the number of payments the investor made.

And i, the periodic rate of interest.

As manually calculating the maturity amount will be complex with a high probability for errors, it is considered a best practice to use a mutual fund sip calculator to simplify and obtain instant & error-free results.

Based on the aforementioned formula, by inputting the data into a mutual fund sip calculator, if an investor invests 500 per month in a mutual fund scheme for 2 years at the rate of 10%, his income after 2 years (24 months) would be 13,333.

Mathematically calculating, the equation would be something like this:
M = 500 X ({[1 + 12%]24  – 1} / 12%) x (1 + 12%) = 13,333

However, for making things easy, it is better to take the help of the mutual fund sip calculator. The sip calculator by Scripbox would be an ideal tool to get an estimate of the returns.

For those who plan to invest for the long run and thereby reap astounding profit, SIP is one of the ideal methods of investment. Since it is most effective for those who invest for a long time, starting with it early is something that is highly recommended by investment experts.

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Naveen Gupta

Naveen Gupta

I am a blogger. I write about business and technology. I love to write.

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