What Is The Method To Calculate The Return On SIP?

A Systematic Investment Plan (SIP) is a popular method of investment in mutual funds. It allows an investor to accumulate wealth by investing a small amount of money regularly over the long term. An investor can start a SIP with a mutual fund and automate the contributions for a given period. These automated periodic investments help investors in becoming disciplined with their investments as well as average out the investments, reducing the effect of market fluctuations in the long term.An investor can calculate returns on SIP investments using a SIP calculator app, which is an online tool that calculates the future returns on SIP investments based on certain factors.

Factors that are considered while calculating SIP returns

The following factors are considered while calculating your SIP returns.

1. Investmentamount

SIP returns are determined by the amount of money invested in each instalment. A higher SIP amount gives a higher return. The instalment amount is decided based on the investor’s capacity, risk profile and financial goal.

2. SIPFrequency

The frequency of investments also determines the SIP returns. SIPs can have a monthly, quarterly or yearly frequency. However, monthly SIPs are the most common way of investing in mutual funds. More frequent investments give better chances for compounding returns.

3. Investmenttenure

Investment tenure is the duration you want to invest in a particular MF scheme. The SIP returns benefit from compounding growth which means how much you will earn depends on how long you continue to invest.

4. Expectedrateofreturn

The expected rate of return is the average rate of return your investment generates over the investment tenure. It projects the potential future returns and gives you an idea of how your investment will perform in the future.

MethodtocalculatethereturnonSIPusing a SIPreturncalculatorapp

A SIP return calculator app uses the above values to calculate the future value of your SIP with the help of the formula given below,

FV = P [ (1+i) Λ n -1] x (1+i)/i 

where,

FV = Future Value or the maturity amount you get

P = Value of SIP instalment

i = Compounded rate of return 

n = Investment tenure

r = Expected rate of return

i = (r/100)/N

N = SIP frequency 

Let us understand this with an example. Assume that you start a monthly SIP of ₹ 1000 for 5 years with an expected rate of return of 10% per year.

Remember that for monthly SIP, you have to convert the rate of return to a monthly figure through division by 12, so

i = (10/100)/12 = 0.0083

P = 1000

n = 5 years = 60 months (5x12)

FV = 1000 [ (1+0.0083)Λ60 - 1] x (1+0.0083)/0.0083 = ₹ 77,981

Hence, the future value of your monthly investment of ₹ 1000 for 5 years at a 10% rate will be ₹ 77,981

Different methods to calculate the returns on SIP

Sometimes calculating SIP returns become difficult using a single method. Hence, there are various methods to calculate the returns on SIP depending on the complexity of the calculations.

AbsoluteorPoint-to-PointReturn

This method can be used to calculate the simple return on your investment if the holding period is less than 1 year.

Absolute Return = (Current NAV - Initial NAV) / Initial NAV x 100

SimpleAnnualisedReturn

This method is used to calculate your annual yield if you stay invested for 1 year.

Simple Annualised Return = [(1+Absolute Return) Λ (365/number of days)] - 1

CompoundedAnnualGrowthRate (CAGR)

For investments of more than 1 year, the CAGR method can be used. Although returns may not be the same every year, CAGR calculates the average annual growth rate of returns.

CAGR = [{(Final NAV/Initial NAV) Λ (1/number of years)} - 1] x 100, if holding period is in years

CAGR = [{(Final NAV/Initial NAV) Λ (12/number of months)} - 1] x 100, if holding period is in months

ExtendedInternalRate of Return (XIRR)

If investments are made at irregular intervals, the XIRR method is used. Returns of the fund are calculated using the XIRR function in Excel.

XIRR = XIRR (Values, Date, Guess) x 100

Conclusion

After understanding, different methods of calculating returns on SIP, it can be concluded that using a SIP return calculator app is a convenient way to calculate estimated returns. It not only helps in taking an informed decision but also helps in planning financial goals so as to gain maximum returns.