Financial planning can seem like a daunting process. Very often, you may need to save money for not one but multiple goals, each with different time horizons.
For instance, you may be setting aside funds for retirement. You may also be saving to buy a house. Additionally, you may be saving for travel, for a big purchase, for contingencies, for your child’s education, and many more life events. Some of these goals may be less than a year away, some three or five years away, some a decade or more away.
Each goal will likely require a different corpus, a different investment avenue and a different strategy. Figuring out how much to set aside for each goal, then, can seem difficult. However, an SIP calculator can make this task quick and easy, helping you work towards potentially achieving your goals through mutual fund investments.
What is an SIP calculator?
An SIP calculator is an online tool designed to help investors estimate the future value of their Systematic Investment Plan (SIP) investments. SIPs allow you to invest a fixed amount at regular intervals in the mutual fund scheme of your choice. Investments can start at Rs 100 or Rs 500 a month and frequency options include daily, weekly, monthly, and quarterly. By inputting variables such as the monthly investment amount, expected rate of return, and the investment period, the calculator provides a clear projection of how much wealth can be potentially accumulated over time through regular investments.
The calculator takes into account the potential effect of compounding on your investment to give you results. Compounding happens when the earnings on an investment, when reinvested, go on to earn further returns. Over time, this can potentially lead to exponential growth. With SIPs, the compounding calculation can be additionally challenging, because each instalment has a different compounding period (the first monthly instalment will be invested for the entire duration, the second instalment for one month lesser, and so on). An SIP mutual fund calculator makes this process much easier.
This simplifies financial planning by offering precise calculations, enabling investors to set realistic financial goals and determine the exact monthly contributions needed to achieve them.
The tool is simple to use and offers instant estimates, making financial planning easier.
Planning for multiple goals with SIP investments
When trying to make a financial plan with multiple goals, using the following steps can streamline the process:
1. Prioritise your goals
Start by listing all your financial goals, such as buying a house, funding a child’s education, planning a wedding, or saving for retirement. Rank these goals based on their urgency and importance. For instance, saving for a child’s education might be more urgent than a vacation fund. Prioritising helps you focus on what’s most critical and allocate your resources accordingly.
2. Estimate the amount required for each goal
Identify how much money you will need for the various expenses. Consider factors like inflation, which can increase the cost of education, real estate, or other expenses over time. An SIP calculator can be incredibly useful here. By entering your target amount, expected rate of return, and investment duration, the calculator provides a clear picture of the monthly SIP required to reach each goal.
3. Identify the time horizon for each goal
The time horizon has a major impact on your investment decisions. This is because different investment avenues are suitable for different investing durations. A short-term goal, like buying a car or going on a vacation, may have a time horizon of one to three years. Medium-term goals, like buying a house, financing a wedding, or paying for a child’s education, may span five to ten years. Long-term goals, such as retirement planning, may extend beyond 10 years. Understanding the time horizon helps you choose appropriate investment avenues, as investment options offer varying return potentials and entail different risk levels.
4. Identify the right investment avenue
Identifying a mutual fund for your financial goals depends largely on the time horizon and risk appetite for each goal. For short-term goals, such as building an emergency fund or saving for a vacation, debt mutual funds may be a suitable avenue, as they offer relative stability of the invested capital and better return potential than savings accounts and some other traditional avenues.
For medium-term goals, such as funding a child’s education or purchasing a car, balanced or hybrid funds, which invest in both debt instruments and equities, can be a good option. These funds seek to achieve an optimised balance between risk and return potential.
For long-term goals, such as retirement planning or buying a house, equity mutual funds can be suitable. These funds invest primarily in stocks and have the potential for higher returns, though they come with higher risk. A long investment horizon can help mitigate the impact of short-term volatilities. Moreover, the effect of compounding – the process of earning returns on returns – can lead to significant wealth-building over a long horizon.
How to use an SIP calculator for planning
Now that you’ve identified the corpus size and suitable scheme category (equity, debt or hybrid), you can use an SIP calculator to ascertain how much you need to invest every month to potentially achieve your goal. Since each goal may have different investment requirements, you may need different SIP amounts for each. A calculator can help you identify these and approach your investments with more clarity. This may lead to a better investing experience than setting aside a sum of money without a clear goal or vision.
Here are the steps you can follow for each goal:
- Enter an affordable monthly SIP amount.
- Enter the expected rate of return (Eg: 6% for a debt mutual fund, 9% for a hybrid scheme and 12% for equity).
- Enter the investment horizon.
The calculator will tell you what your final corpus size will be, based on these estimates. Based on the output, you can determine whether you need to increase or decrease your monthly SIP investments for each goal.
For example, if you need approximately Rs 50 lakh for your child’s higher education in 10 years and expect an annual return of 12%, the SIP calculator will show you that you will need to invest close to Rs. 22,000 a month to potentially reach that goal. Similarly, if you aim to accumulate Rs 2 crore for your retirement in 20 years and expect an annual return of 12%, the SIP calculator will show you that you need to invest approximately Rs. 21,000 every month.
Lastly, if you want to save Rs 7 lakh to buy a car in three years, and plan to invest in a debt mutual fund where you expect a 6% return, the calculator will show you that you will need to invest Rs 18,000 a month approximately.
Now that you have the monthly SIP amounts for each goal, allocate your funds accordingly. It’s essential to balance your current expenses with your future savings. Ensure that your total monthly SIP investments do not exceed your capacity, allowing you to maintain a comfortable lifestyle while saving for the future.
Diversify your SIP investments across different mutual funds to spread risk and maximize returns.
Monitor and adjust regularly
Financial planning is not a one-time activity. Regularly monitor your SIP investments to ensure they align with your goals. Life events such as a job change, marriage, or having children can impact your financial situation. The SIP calculator can be used periodically to reassess your investment strategy and make necessary adjustments.
For example, if you receive a salary hike, you might want to increase your SIP investments to reach your goals faster. Conversely, if you face financial constraints, you might need to adjust your SIP amounts temporarily.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
