How the SIP Calculator Works
A Systematic Investment Plan (SIP) lets you invest a fixed amount in mutual funds every month. The power of SIP comes from compounding — your returns earn returns, creating exponential growth over time.
The SIP Formula
This calculator uses the standard future value of annuity formula with proper monthly compounding:
FV = P × [((1 + i)n − 1) / i] × (1 + i)
Where:
- P = Monthly SIP amount
- i = Monthly rate of return =
(1 + annual_rate)1/12 − 1
- n = Total number of months
- FV = Future value of your investment
Why Proper Monthly Compounding Matters
Many calculators simply divide the annual return by 12 to get the monthly rate (e.g., 12% ÷ 12 = 1%). This is incorrect and inflates results. The mathematically accurate approach is to convert using:
Monthly Rate = (1 + Annual Rate)1/12 − 1
For a 12% annual return, the correct monthly rate is 0.9489%, not 1%. This calculator uses the accurate formula, so the numbers you see here are reliable.
Step-Up SIP
With Step-Up SIP, your monthly investment increases by a fixed percentage every year. This is powerful because even a small annual increase significantly boosts your final corpus. For example, a ₹10,000 SIP with 10% annual step-up for 20 years at 12% return gives roughly 50% more than a flat ₹10,000 SIP.
SIP vs Lump Sum Investment
Both are valid ways to invest in mutual funds, but they suit different situations:
- SIP — Invests a fixed amount monthly. Benefits from rupee cost averaging (you buy more units when prices drop). Ideal for salaried investors with regular income.
- Lump Sum — Invests the entire amount at once. Can outperform SIP in a consistently rising market. Ideal when you receive a bonus, inheritance, or have idle cash.
For most investors, SIP is the practical choice — it builds discipline, reduces timing risk, and works well with monthly income.
Tax on SIP Returns (Equity Mutual Funds)
Each SIP instalment is treated as a separate purchase for tax purposes:
- Short-Term Capital Gains (STCG): If redeemed within 1 year of purchase, gains are taxed at 20%
- Long-Term Capital Gains (LTCG): If held for more than 1 year, gains above ₹1.25 lakh per financial year are taxed at 12.5%
- Debt Funds (post April 2023): Always taxed at your income slab rate regardless of holding period
Frequently Asked Questions
How is SIP return calculated?
SIP returns use the future value of annuity formula with compound interest. The annual return rate is converted to a monthly rate using proper compounding (not simple division by 12), then applied to the formula: FV = P × [((1 + i)^n - 1) / i] × (1 + i).
What is a good expected return rate for SIP?
Historical returns vary by fund category: Large-cap equity funds ~10-12%, Mid/Small-cap ~12-15%, Index funds (Nifty 50) ~11-13%, Hybrid funds ~8-12%, Debt funds ~6-8%. These are long-term averages — actual returns fluctuate year to year.
What is Step-Up SIP?
Step-Up SIP increases your monthly investment by a fixed percentage every year. For example, a ₹10,000 SIP with 10% step-up becomes ₹11,000 in year 2, ₹12,100 in year 3, and so on. This helps your investments grow with your income and significantly boosts the final corpus.
Is SIP better than lump sum?
SIP benefits from rupee cost averaging — you buy more units when prices are low, reducing the impact of market volatility. Lump sum can outperform in a consistently rising market. For salaried investors with regular income, SIP is practical and disciplined.
Can I change my SIP amount later?
Yes, most mutual fund houses allow you to increase, decrease, pause, or stop your SIP at any time. You can also set up a Step-Up SIP that automatically increases your amount annually.
Are SIP returns guaranteed?
No. SIP returns depend on market performance. The expected return rate in this calculator is an assumption — actual returns can be higher or lower. However, over long periods (10+ years), equity SIPs have historically delivered strong inflation-beating returns.
