How Do We Calculate SIP Returns?
In a Systematic Investment Plan (SIP), a fixed amount is regularly invested in a mutual fund, often monthly. Unlike a lump sum investment, where returns are straightforward to calculate based on a single transaction, SIP returns are more complex due to fluctuating NAVs (Net Asset Values) and multiple investment dates. Below are the main methods to calculate mutual fund returns, including the most suitable one for SIPs:
- Absolute Return
Absolute return measures the percentage gain or loss from the initial to the final value of your investment. This method is simple and shows point-to-point growth over a specific period. For example:
- If your investment of ₹1,00,000 grows to ₹1,50,000, the absolute return is:
[(₹1,50,000 – ₹1,00,000) / ₹1,00,000] × 100 = 50%
However, absolute return does not consider the investment duration, making it unsuitable for comparing returns across funds or measuring long-term growth.
- Compounded Annual Growth Rate (CAGR)
CAGR calculates a lump sum investment’s average annual growth rate over a specified period. It gives a clear picture of yearly growth, assuming compounding. The formula is:
CAGR = [(Final Value / Initial Value)^(1/n)] – 1
For example:
- An investment of ₹1,00,000, growing to ₹2,00,000 in 6 years, has a CAGR of 12%.
While useful for lump-sum investments, CAGR is not ideal for SIPs because the time duration for each instalment varies, making calculations cumbersome.
- Extended Internal Rate of Return (XIRR)
The XIRR method is the most suitable for SIPs as it considers the timing of each investment and the varying durations of instalments. XIRR aggregates the returns of each SIP installment into a single rate of return. Using Excel, you can calculate XIRR with the formula:
| SIP Date | SIP Amount |
| 01-01-2024 | ₹ -10,000 |
| 01-02-2024 | ₹ -10,000 |
| 01-03-2024 | ₹ -10,000 |
| 01-04-2024 | ₹ -10,000 |
| 01-05-2024 | ₹ -10,000 |
| 01-06-2024 | ₹ -10,000 |
| 01-07-2024 | ₹ 62,000 |
=XIRR(values, dates, guess) Here, “values” are the SIP amounts and “dates” are the investment dates. XIRR for the above example is 11.88%.
This method provides a clear and accurate picture of SIP returns, making it the preferred choice for calculating returns from periodic investments.
Understanding how SIP returns are calculated is crucial for goal-based investing. By leveraging SIPs, mutual fund distributors help investors align their investments with long-term financial goals like retirement, children’s education, or home purchase. This strategy enables investors to benefit from wealth creation through disciplined, goal-oriented investing.
