How to Calculate SIP Returns?
There is no doubt that Systematic Investment Plans
(SIP) has become one of the popular means to invest in mutual funds. After
setting up an SIP, the investors invest a pre-determined amount of money at
regular intervals in a specific mutual fund. You can invest in several mutual
funds through SIP.
Many investors have the misconception that SIP
investment is safer than onetime investment. It is just a myth and the returns
on SIP investments depend on various factors such as the mutual fund category,
the performance of the market and time.
In this article, we will discuss the different ways
to calculate SIP returns.
Return Calculation for SIP
Calculation of SIP returns is little different from
calculating returns on onetime investments. It is because SIPs are regular
investments throughout the course of a period, while lump sum investment is a
onetime investment.
One way that most investors calculate SIP returns
to understand the growth in their SIP investments is by adding the total
investment amount in the year and calculating the returns on the entire
investment. However, it is not the right way to calculate the returns on SIP.
Let us take an instance for clarification. We
assume that you have set up an SIP of Rs.10,000 that has given a return of 10%.
In the case of SIP investments, the first SIP instalment will generate a return
of Rs.1000 i.e., total 10% returns while the return on the next instalment will
be Rs.916.67 and so on.
Ways to Calculate SIP returns
Here are some methods to calculate SIP returns:
Absolute Return
Absolute return is the easiest way to calculate
mutual fund returns. It is also known as the point-to-point return, as the
initial and present unit price (NAV) is used to calculate the returns.
Absolute return = (Present NAV – initial NAV) /
initial NAV x 100
The absolute return can be used to calculate the
annualised returns.
Let us assume that the NAV of a mutual fund has
increased from 20 to 35 in 7 months or 210 days. In that case, the absolute
return is 75%.
However, considering absolute returns to calculate
SIP returns won’t be right, as the investor does not invest the total amount of
SIP at one time.
Simple Annualised Return
The returns that are shown are typically yearly
returns of an investment option. But what if your holding period is less than
12 months? In that case, you can annualise the returns.
Simple Annualised Return: ((1 + Absolute Rate of
Return) ^ (365/number of days)) – 1
If we take the example where the absolute return
was 75%, the annualised return will be
= {(1 + 75%) ^ (365/210)} – 1 = 164%
XIRR Method
XIRR is the most widely used method to calculate
SIP returns as it considers the different cash flows to calculate the internal
rate of return.
You can use the XIRR formula in excel to calculate
the SIP returns.
XIRR formula in excel is: XIRR (value, dates,
guess)
Conclusion
Calculation on SIP is little different from return
calculations on onetime investment, as the SIPs are regular investments and the
investment amount may vary. XIRR is the best way to calculate SIP returns. You
can also use a SIP calculator to check out your SIP returns.
This blog is purely for educational purposes
and not to be treated as personal advice. Mutual fund investments are subject
to market risks, read all scheme-related documents carefully.
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