An SIP calculator takes in to consideration the SIP amount, your investment tenure and the average rate of return to give you the amount that you can earn if you continue investing over the stated tenure.

The SIP calculator works on the following formula:

Principal amount * (1 + rate of expected return/total investment tenure)^no. of months invested

For your understanding, let’s suppose you start an SIP investment of Rs. 10,000 per month for a year. Every SIP of Rs. 10,000 at the beginning of the month will be considered a fresh investment.

Assuming the expected return rate is 12% per annum, the first SIP of Rs. 10,000 made on January 1 will give the following return: Rs. 10,000*(1+12%/12)^12 = Rs. 11,268

The second SIP of Rs. 10,000 made on February 1 would give following return: Rs. 10,000*(1+12%/12)^11 = Rs. 11,157

Similarly, the twelfth SIP of Rs. 10,000 made on December 1, would give you a return of 10,000*(1+12%/12)^1 = Rs. 10,100

By adding the returns of 12 SIPs we get expected amount at the end of the 1 year as Rs. 1,28,093.

Thus, amount invested = SIP amount * number of months, which in the above case will be Rs. 1,20,000

Consequently, wealth gain = expected amount - amount invested, which in this case is Rs. 1,28,093 - Rs. 1,20,000= Rs. 8,093.