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# MF-Query Board

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How are the returns on SIP calculated?
- Darshan Reddy

There are various ways in which you can calculate the SIP returns:

Point-to-Point Returns or Absolute Returns

Absolute returns simply help you to calculate the returns on your original investment. For calculating this, you only need the original NAV (net asset value), which means the NAV at which you originally invested and the current NAV of the scheme. While calculating the point-to-point returns, there is no use of the holding time. Say, for instance, your NAV on which you made the original investment is 20 and after say three years, it is 40. So, here the absolute returns work out to be 100 per cent.

In a nutshell, absolute returns = Current NAV – Original NAV / Original NAV x 100. You can easily calculate this using Excel. However, you need to keep in mind that this would be the absolute return of the single SIP. Likewise, you need to calculate for all the SIPs that you may have done and then take an average to get the absolute returns of all the SIPs. Don’t use this for a period of more than 12 months as it won’t give you the right picture.

Compounded Annual Growth Rate (CAGR)

This is absolute return but with holding time. CAGR would prove to be a better way of looking at returns than absolute returns. Even if you look at the fact-sheet of any mutual fund the returns above one year are shown in terms of CAGR and below one year as absolute returns. CAGR simply shows the steady rate of return at which your investments have grown over the given period. It just clears out the volatility from the picture and gives you the mean annual growth rate. You may calculate it as: CAGR = [(Current NAV/ Original NAV) ^ (1/N)] - 1 x 100, where N is number of years. If your holding period is in months, then other factors being the same, replace (1/N) by (12/N). Similarly, if the holding period is on a daily basis, replace (1/N) by (365/N) in the above formula. Similarly, like absolute returns of SIP, you need to calculate CAGR for each SIP and then take an average to come up with CAGR of all the SIP returns.

SIP Returns Using XIRR

When it comes to irregular cash flows (inflows as well as outflows), calculating returns based on absolute returns and CAGR can prove to be futile. So, here we need to calculate XIRR. XIRR is nothing but an internal rate of returns or an annualised rate of returns of a schedule of cash flows that are occurring at irregular intervals. For calculating SIP returns this would be the ideal method, the reason being that SIP is not like lump sum wherein you just invest one time. SIP is regular investment done over a long period of time with units redeemed as and when required. Therefore, to calculate XIRR you would need Microsoft Excel, date at which your SIPs got invested, date at which you redeemed all your units, and the amount that you received after redeeming all units. Using XIRR function in Excel will give you the desired result.

Systematic Investment Plan or SIP, as it is widely known, is not an investment avenue. In fact, it is the way in which you can invest small amount of money periodically in an investment avenue such as mutual funds, to be specific. Investments in mutual funds can be done in two ways: It can either be done by investing lump sum money at once or you have an option to opt for a SIP where you invest desired amount periodically. This period can be daily, fortnightly, monthly, semi-annually or annually. However, monthly SIP is often the preferred one as it becomes easy for a salaried person to track his or her cash flows. There is no such rule that SIP gives you more returns than lump sum or the other way round. It is a part of convenience.

Let’s say, for instance, you wish to achieve your financial goal 10 years from today for which you require to invest lump sum of Rs 3 lakhs or SIP of Rs 2,000 per month for 10 years. Here, if you have Rs 3 lakhs available to invest, you should go for lump sum investment or else you may opt for SIP. Though many people prefer the SIP route even if they have lump sum, they invest in a liquid fund or ultra-short duration fund and from there they create a monthly STP (Systematic Transfer Plan) to a desired fund. If you are a disciplined investor where you allow your investments to grow and don’t exit in panic then you can opt for lump sum, else investing through SIP would be a better option as it will help you to invest in a disciplined manner and also be helpful in managing market volatility as it enjoys the benefit of rupee cost averaging.

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