Investing in mutual funds through Systematic Investment Plans, or SIPs, is an increasingly popular way to potentially build wealth over time. 

However, when markets fall, many investors feel anxious and wonder how their investments will fare. One useful tool to help you understand and prepare for the potential impact of a market downturn is an SIP yearly calculator. In this article, we will explain how you can use this calculator to assess the effects of market volatility on your portfolio, and how to adjust your strategy if required.

What is a SIP yearly calculator?

A SIP yearly calculator is an online tool that helps investors estimate the potential future value of their SIP investments over a given period. You enter details like the amount you invest every month or year etc., the expected rate of return, and the duration of your investment. The calculator then provides an estimated final corpus. 

SIP yearly calculators are mainly used for planning investment approaches or tracking portfolio progress. However, investors can also use these tools to prepare for market volatility and stay on track of their investments during market volatility.

Understanding market dips and their impact

Investing in the market comes with risks. Stocks offer the potential for significant wealth accumulation over time, but markets are unpredictable, and prices keep fluctuating, especially in the short term. Such dips can be minor or steep, brief or prolonged, depending upon the factors causing it. 

Volatility can be triggered by various factors, such as economic slowdown, political instability, or global events. When the market drops, the value of your investments falls, sometimes drastically. However, history has shown that markets eventually recover* and long-term investors often see growth after the recovery. (*Past performance may or may not be sustained in the future).

During such crashes, the fall in the market may seem overwhelming, but if you are invested regularly through SIPs, you can potentially leverage market downs as well through rupee cost averaging. 

Rupee cost averaging means that you buy more units of the mutual fund when the price is low and fewer units when the price is high, which helps in smoothing out the impact of volatility.  

How to simulate market dips using a SIP yearly calculator

While a SIP yearly calculator is helpful, it typically assumes a constant rate of return for its estimates, which does not capture the real-time fluctuations of the market. So, for a more holistic picture, you can simulate periods of lower or minimal growth. You can also manually estimate negative growth for a short horizon if the calculator does not have this option. 

Here’s how:

1. Enter your SIP amount: Suppose you invest a fixed amount every month for ten years.

2. Adjust the return rate: Instead of 12 percent, reduce the return rate to the least available value on the tool for a duration of say one or two years. Or, calculate negative returns manually. 

3. Observe the outcome: The calculator will show a lower corpus for the years when the market is down. Then, gradually increase the return rate for the following years to simulate potential recovery.

Note: The calculator’s estimates are for illustrative purposes only. Returns are not guaranteed and depend upon market conditions. 

While it may require you to make multiple adjustments, you can see how downturns might affect your final portfolio value. You may see how, despite downturns, your investment can potentially recover with time. This can help you set more realistic goals and avoid making rash decisions based on short-term market movements.

It is essential to note, however, that markets will be unpredictable so even if you do project a few years of market dips, the actual extent and duration of the dip during your investment horizon can vary and returns may be higher or lower than your projections. Hence, using a conservative estimate is recommended. 

Adjusting your SIP strategy 

As you explore various scenarios with the SIP yearly calculator, you may consider modifying your SIP investments plan to better withstand market volatility. A well-thought-out SIP investments plan will take into account your risk tolerance, financial goals, and investment horizon.

When a market dip occurs, there are several strategies you can consider:

1. Increase your SIP: During a dip, units are purchased at a lower price. By increasing your SIP contributions temporarily, you can take advantage of rupee cost averaging, buying more units at a lower cost.

2. Stay invested: A common mistake is to stop investing during a downturn. The SIP calculator can show that even with a period of negative returns, long-term wealth creation is possible if you remain invested.

3. Review your financial goals: Use this period to reassess your SIP plan. A crash might prompt you to think about extending the investment period or adjusting your plan.

By revisiting your SIP investments plan during volatile periods, you can make informed decisions that align with your long-term goals. Remember that investing is a long-term process, and short-term market fluctuations are a normal part of the journey.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.