Systematic Investment Plan
Systematic Investment Plan
Systematic Investment Plan (SIP) is a method of investing a fixed sum regularly in a mutual fund. SIPs are designed to encourage disciplined investment, allowing investors to accumulate wealth over time through regular, smaller investments.
Formula to Calculate SIP Returns
The formula to calculate the future value of SIP investments is:
\[ A = P \times \left( \frac{(1 + r)^n – 1}{r} \right) \times (1 + r) \]
Where:
- A: The amount of money accumulated after n months, including interest.
- P: The amount invested at regular intervals.
- r: The periodic interest rate (annual interest rate divided by 12).
- n: The total number of payments (investment periods).
Example of Calculating SIP Returns
Assume you invest $500 every month in a mutual fund with an annual interest rate of 12%. The interest rate per month would be:
\[ r = \frac{12\%}{12} = 1\% = 0.01 \]
If you invest for 5 years (60 months), the future value of the SIP would be calculated as follows:
\[ n = 5 \times 12 = 60 \]
\[ A = 500 \times \left( \frac{(1 + 0.01)^{60} – 1}{0.01} \right) \times (1 + 0.01) \]
Calculating step-by-step:
1. Calculate \((1 + 0.01)^{60}\):
\[ (1 + 0.01)^{60} \approx 1.816 \]
2. Subtract 1:
\[ 1.8167 – 1 = 0.8167 \]
3. Divide by 0.01:
\[ \frac{0.816}{0.01} = 81.67 \]
4. Multiply by the monthly investment and add the final month’s interest:
\[ 500 \times 81.67 \times 1.01 = 41,243\]
So, the future value of the SIP after 5 years would be approximately $41,243
