The most popular mode of mutual fund investment today is an SIP (systematic investment plan) investment. It helps investors benefit from rupee-cost averaging and leverage the power of compounding. Read on to know how you can choose the right mutual fund scheme by comparing mutual funds using an SIP calculator.
What is an SIP calculator?
An SIP calculator is a free, online tool that helps investors calculate their mutual fund returns in advance. You must enter three values to use an SIP calculator – a target amount, the investment horizon, and your expected returns.
How to compare mutual funds using an SIP calculator?
- Fix a target amount: The first field that you must enter is the target amount. You can know your target amount by fixing an investment objective.
- Enter a value for the investment horizon: Having a clear idea about your investment objective can also help you decide on the right investment horizon for your mutual fund investment.
- Enter a value for your expected returns: You must enter a realistic figure in this third field.
- Try entering different values to find your ideal investment amount and horizon: As a final step, you can try entering different values to find the right investment amount and horizon to achieve your investment objectives.
How to select the best mutual fund investments using an SIP calculator?
- Fix an investment objective: You must start by asking yourself why you wish to invest in an SIP. Fixing an investment objective can help you take the right investment decisions in the future by keeping you well oriented. You can also choose the right investment horizon and amount if your investment objective is well defined.
- Assess your risk appetite: Next, you should assess your risk-taking capacity. Mutual fund companies offer individuals a variety of mutual fund investments to choose from, allowing them to choose the ones that go well with their risk appetite.
- Shortlist similar mutual funds and compare them using an SIP calculator: As the third step, you must shortlist similar mutual funds and compare them using an SIP calculator as described in the previous section. Remember that the category of funds in this shortlist must be the same. Comparing a debt mutual fund to an equity fund, for instance, would not be helpful.
- Analyse the fund’s management: You should also read about the mutual fund’s management before choosing a mutual fund scheme. Read about the fund manager’s experience and investment style to know how your money will be managed.
- Check the fees charged by the mutual fund: Your mutual fund returns are directly affected by the fees charged by the mutual fund scheme. These are fees like the expense ratio and exit load. You must eliminate the mutual funds in your shortlist that charge a high expense ratio or exit load.
- Check the mutual fund’s tax efficiency: Finally, you must check the tax-adjusted returns offered by the fund. If you wish to save more in taxes, you can also invest in an ELSS (equity-linked savings scheme) fund that has a mandatory lock-in period of three years. Be sure to consider your liquidity-related requirements while assessing a fund’s tax efficiency and tax-adjusted returns.
You must carefully analyse your risk appetite, liquidity-related requirements, and investment horizon before investing in a mutual fund scheme through an SIP.
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