If your investments in mutual funds are via the SIP (Systematic Investment Plan) route, then calculating the returns on your mutual fund investments may not be as simple as calculating the returns from a lump sum investment. If you are wondering what is SIP, it is merely a means to invest in mutual funds.
SIP Simplified
Calculating returns on SIP investments can be a bit challenging. This is because you have made several investments at different points that give each investment a diverse holding period in the investment. So, in a 12-month SIP made on the third of each month, the first instalment would have 12 months to grow, while the last instalment would have only a month to grow. The returns earned on each installment would be different depending upon the price at which each instalment was invested and the period available to the particular investment to grow.
How you quota your rate of return can make a substantial difference in terms of how you evaluate an investment. For mutual fund investors who are investing towards a goal, this becomes even more important. The rate of return that a financial goal demands can decide whether you need to invest in SIP more or less to reach that particular goal.
Let's look at some ways an investor can calculate returns on their investment for their SIPs:
Compounded Annual Growth Rate (CAGR)
When the time period is greater than a year, CAGR is a better way to illustrate returns. It's basically a figure that shows how the mutual fund investment would have grown had it generated a steady return. However, in reality, returns may not be the same each year. Therefore, CAGR denotes a mean annual growth rate that smoothens out the volatility in returns over a period.
For Calculating Returns On SIP Investments, Use XIRR
Cash inflows and outflows might not always be evenly matched and instead, these could be at uneven intervals, like, in a mutual fund SIP or in a money-back plan. XIRR or Extended Internal Rate of Return is a function in to calculate annualised yield or internal rate of return for a calendar of cash flows occurring at irregular intervals.
In an SIP investment, you keep investing regularly over a long period of time and get back the returns in the market upon maturity. As you know, SIP investments happen on a pre-determined date with the amount being fixed, and as they depend on the NAV of the scheme on that day, you get a certain number of mutual fund units. Hence, you keep collecting units from the day your SIP starts. On the day your SIP investment matures, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day).
You can also use an SIP calculator to understand the returns on your SIP investments. Happy investing with your SIPs!
Calculating returns on SIP investments can be a bit challenging. This is because you have made several investments at different points that give each investment a diverse holding period in the investment. So, in a 12-month SIP made on the third of each month, the first instalment would have 12 months to grow, while the last instalment would have only a month to grow. The returns earned on each installment would be different depending upon the price at which each instalment was invested and the period available to the particular investment to grow.
How you quota your rate of return can make a substantial difference in terms of how you evaluate an investment. For mutual fund investors who are investing towards a goal, this becomes even more important. The rate of return that a financial goal demands can decide whether you need to invest in SIP more or less to reach that particular goal.
Let's look at some ways an investor can calculate returns on their investment for their SIPs:
Compounded Annual Growth Rate (CAGR)
When the time period is greater than a year, CAGR is a better way to illustrate returns. It's basically a figure that shows how the mutual fund investment would have grown had it generated a steady return. However, in reality, returns may not be the same each year. Therefore, CAGR denotes a mean annual growth rate that smoothens out the volatility in returns over a period.
For Calculating Returns On SIP Investments, Use XIRR
Cash inflows and outflows might not always be evenly matched and instead, these could be at uneven intervals, like, in a mutual fund SIP or in a money-back plan. XIRR or Extended Internal Rate of Return is a function in to calculate annualised yield or internal rate of return for a calendar of cash flows occurring at irregular intervals.
In an SIP investment, you keep investing regularly over a long period of time and get back the returns in the market upon maturity. As you know, SIP investments happen on a pre-determined date with the amount being fixed, and as they depend on the NAV of the scheme on that day, you get a certain number of mutual fund units. Hence, you keep collecting units from the day your SIP starts. On the day your SIP investment matures, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day).
You can also use an SIP calculator to understand the returns on your SIP investments. Happy investing with your SIPs!
