As SIP allows investors to invest small amounts of money systematically instead of a lump sum, the investment can be done on a weekly, monthly and quarterly basis. Depending on the Net asset Value (NAV) of the funds, the numbers of units are allocated to the investors.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
How to Calculate Return Rate on SIP
SIP is a well-disciplined way to invest and create wealth for future. Since investments are done in intervals, the impact of market volatility reduces automatically. So, in order to know how a particular fund is performing in the market, one can calculate return on SIP mutual fund.
However, there is fixed SIP interest rate as investments are made in market-linked instruments whose rate of return fluctuates from time to time. With the help of an SIP calculator, one can calculate the wealth gained or the return from the monthly SIP investments.
In order to evaluate the performance of SIP scheme, there are different ways by which the investors can calculate return on their investments. Further in this article, we have described some of the ways through which you can calculate return rates in SIP.
Absolute Return or Point to Point Return
Absolute return or point to point return helps to calculate the simple return on the initial investment. In order to calculate the absolute return of the investment, one just needs the current and the initial or the ending Net Asset Value of the scheme. The absolute return can be calculated as well. For example, let’s say the initial Net Asset Value of the fund you invested in is Rs.20 and after 3 years, it is Rs.40, the absolute return comes to 100%.
Absolute return= (Current NAV – Initial NAV)/ Initial NAV X 100
This formula can be used to calculate returns when the holding period is less than 12 months.
Simple Annualized Return- This helps to annualize the return generates in case of less than 12 months of holding period. Simple annualized return can also be termed as effective annual yield. For annualizing the return generated one can use this formula.
((1+ Absolute Rate of Return) ^ (365/Number of Days)) — 1
For example:- Let’s assume the Net Asset Value of Rs20 increases up to Rs.25 in 7 months i.e.210 days. In this case the absolute return is 25% over 7 months.
So, it can be calculated as:
= ((1+ 0.25) ^ (365/210)-1
= 47.38%
Therefore, absolute return as mandated by Security and Exchange Broad of India (SEBI) is calculated in case of the period less than 1 year and in case the period is exactly 1 year, then simple annualized return is shown.
Compounded Annual Growth Rate (CAGR)
In case, the time period is more than 1 year then compounded annual growth rate is a much better way to calculate returns. CAGR is basically a number that depicts the growth of investment and how it had generated a steady return. However, in reality the returns may vary from year to year. Therefore, CAGR shows a mean annual growth rate that equalizes out the volatility in return over a period of time.
Compound Annual Growth Rate can be quickly computed using this formula
= (ending- value/ beginning- value)^ (1/number of years)-1*100
In case the holding period is more than one month, then one can use the below mentioned formula to calculate compound annual growth rate.
= (ending – Value/beginning-value) ^ (12/ number of months) — 1*100
Similarly, if you have both net asset value (NAV) of your fund and the number of days, then you can use the formula
= (ending-value/beginning-value) ^ (365/number of days) – 1*100
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Use XIRR, for Calculating SIP Return- As the SIP interest rates are flexible, the cash outflow and inflow can vary because of irregular intervals and cannot be evenly matched. Through XIRR, one can calculate the internal return rate as well as annualized growth rate for a scheduled cash flow that occurs at irregular intervals.
As mentioned above, one needs to keep investing in SIP at regular intervals for as long as he/she wants. Long-term investment will be beneficial with the maturity amount upon exit. Depending upon the net asset value of the scheme, the date of SIP is pre-decided and even the amount is also fixed. Under SIP scheme, the investors get certain number of units. Hence, from the day SIP starts, the investors keep accumulating the units till the date of exit. The total unit is redeemed as the maturity amount, which is also known as the net asset value (NAV) multiplied by total units.
One can use XIRR to calculate the total return one scheme has generated. In order, to calculate XIRR all you need is
- SIP amount
- Dates of SIP investments
- Date of redemption
- Maturity amount.
Conclusion
As compared to the lump-sum investment, SIP is more beneficial as the amount is invested in a monthly basis, so there is very less or no negative impact of market volatility. Moreover, SIP funds provide flexibility to the investors as one can create, update or cancel SIP anytime. By comparing the changing SIP return rates, you can choose the most beneficial scheme according to your own choice.
You may also like to read: SIP Returns & Relation to Share Markets
