Investing in mutual funds after using an online SIP calculator can help you plan your Systematic Investment Plan (SIP) investments better. However, SIP return calculators have another key purpose – they help you account for inflation while calculating your future SIP returns. Learn more about how SIP calculators do this.
How does inflation impact SIP investments?
Inflation has a negative impact on SIP returns, regardless of the mutual fund scheme you have invested in. If the inflation rate is 5-6% annually and an SIP investment generates a return of 10%, then the real return after accounting for inflation would only be between 4-5%.
Here are other significant ways in which inflation can impact your SIP investments:
- Your financial goals might get costlier since high inflation directly affects your purchasing power. Hence, if you were planning to build a corpus of ₹1.5 crore for your child’s education in the next 15 years, you might want to target nominal returns of 12-14% instead of 10-12%. You can adjust your targets for these goals by using a step-up SIP calculator which helps you increase your SIP income by a fixed percentage or amount regularly to meet your financial goal.
- Stagflation can lead to a drop in the returns offered by various asset classes. Stagflation is when high inflation is accompanied by low economic growth. It impacts various asset classes. Stagflation has a negative impact since besides eroding an individual’s purchasing power, it reduces their investments’ returns. You must factor in the risk of stagflation while estimating long-term returns and revising your financial goals.
- Asset classes like gold generally offer a more effective hedge against high inflation when compared to other asset classes. Among debt-based assets, gilt funds may sometimes fare better than credit risk funds during high inflation. You must analyse your portfolio well and invest accordingly to protect your portfolio against inflation.
What are SIP calculators, and how do they account for inflation?
SIP calculators are free, online tools that help you estimate the value of mutual fund returns. To use an SIP return calculator, you must enter your expected rate of return, investment amount, and tenure in the online calculator.
It helps you calculate your expected returns within a few seconds and accounts for inflation while doing the same. You can plan for your SIP investments and account for inflation by using an SIP calculator with top-up before investing in a fund.
To sum up
You can use an SIP calculator to account for future inflation while investing in a mutual fund scheme. This online tool helps you accurately estimate your mutual fund returns in a scheme by helping you know the ideal investment amount, most suitable investment horizon, and the ideal value of SIP contributions (per month) to meet your financial goals. By accounting for inflation when estimating returns, it gives you a more accurate picture of your investment value at the end of the investment tenure.
