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Systematic Investment Plans (SIP) are an increasingly popular way to potentially build wealth over time. They allow you to invest in affordable installments in mutual funds, making it easier to stay disciplined about your financial goals.
When investing in mutual funds through this mode, SIP calculators online can provide valuable financial planning assistance. Not only can they help you estimate the potential returns on a single investment, but they can also guide you in crafting a diversified portfolio to work towards potential long-term financial success.
In this article, we will explore how you can use SIP calculators for insights into building a well-rounded portfolio.
Why is diversification important?
Let’s start with a basic concept of investment: diversification. You must have heard the phrase, “Don’t put all your eggs in one basket.” Diversification means spreading your investments across different asset classes, sectors, and market capitalisations to reduce risk.
Diversification helps you:
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Reduce the impact of market volatility.
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Manage risk while aiming for steady growth potential.
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Avoid over-dependence on a single asset class for returns.
What is an SIP calculator online and how does it work?
An SIP calculator is a digital tool that helps you estimate how much your SIP investments can potentially grow over a specific period. By entering basic details like monthly investment amount, expected annual return, and investment duration, you can get an estimate of the wealth you could accumulate.
Most people use SIP calculators only to figure out the potential size of their future corpus. However, these tools can do much more when used effectively, especially when you want to diversify your investments.
Using SIP calculators for diversified portfolios
Now, let’s explore how you can use an online SIP calculator to plan a diversified portfolio:
1. Comparing different asset classes
SIP calculators allow you to check potential returns for equity funds, debt funds, and hybrid funds. For example:
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If you’re targeting high growth potential over the long term, equity funds might be suitable.
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If your focus is on relative stability with moderate returns, you could consider debt funds.
By running multiple calculations using different return estimates (higher ones for equity funds and lower ones for debt funds), you can see how each type fits into your overall strategy.
2. Setting goal-based allocations
When planning your portfolio, divide it into financial goals like retirement, children’s education, or buying a house. Use SIP calculators to align specific funds with each goal:
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For long-term goals like retirement, equity funds could be suitable.
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For short-term goals like a vacation or an emergency fund, debt funds are ideal.
SIP calculators can help you experiment with different investment amounts to allocate resources optimally for each goal.
3. Testing various durations
You might wonder, “Should I invest for five years or ten years?” An SIP calculator lets you test different durations and see how compounding impacts your returns. This way, you can decide which funds should be held longer based on their risk and growth potential.
4. Including alternative investments
In a diversified portfolio, you could also consider adding alternative investments like gold funds or international mutual funds. SIP calculators can estimate returns on these options too, giving you insights into whether they fit into your strategy.
While estimating the potential returns for an investment/asset class, you can consider historical returns for each category over multiple cycles, such as three years, five years, Ten years, etc. Don’t just look at the fund with the highest returns, consider an average and be conservative in your expectations. Also, do note that past performance may or may not be sustained in the future. However, it can help you identify a feasible return rate for the purpose of calculations.
Example: Building a balanced portfolio
Let’s say you have Rs. 20,000 to invest every month. Using an SIP calculator, you can see how much you can potentially earn with equity SIPs and how much you can earn with debt SIPs. You can then decide how to divide your investments between the two.
You can also plan your investments goal-wise. Identify any one goal and see how much you need to invest and where depending on your goal amount and timeline. Accordingly, see what is left from your monthly investing capacity to plan SIPs for other goals. Adjust the various parameters to arrive at a suitable combination.
Do note that for short-term goals, equity funds may not be suitable. So, it is important to consider your risk appetite and investment horizon while making your investment plan.
Factor in inflation
One important point many investors overlook is inflation. An online SIP calculator can give you a projected return figure, but it is essential to account for how inflation reduces the actual value of your returns. It is equally important to remember that the calculator’s estimates are based on your inputs and the tool assumes a fixed rate of return for its estimates. In reality, mutual fund returns are not guaranteed and depend upon market conditions. There is no assurance that returns will be along the expected lines.
Pair SIP calculators with other financial tools
While SIP calculators help you with adequate planning, they assist more favourably when combined with other financial tools. For instance, a daily compound interest calculator can help you understand how compounding works on different types of investments. By using multiple calculators, you can compare SIP returns with other investment options to make more informed decisions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.