How Does One Calculate Return In Sip

By Author: Vinay Pale
Total Articles: 11
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In a mutual fund, there are two ways to start your investing journey. A SIP allows you to invest a fixed amount of money every month. Here, the investment money is a constant figure on which the return is measured. Mutual funds units are bought at a specific net asset value (NAV). This NAV keeps on changing with SIP investments.

Absolute Return:

The calculation of your total gain or loss in a year is called absolute return. The way of calculating the Absolute Return is really straightforward. The basic formula is

Absolute return: [(Final NAV - Initial NAV) /Initial NAV]*100

So for eg: if your opening NAV is Rs. 10 and it becomes Rs. 15, then the calculation will be:

Initial Nav: Rs. 10
Final Nav: Rs 15

SO the formula will be: [(15 - 10) /10]*100 = 50%

Pointers for Absolute Returns:

● This is one of the easiest ways to calculate the SIP returns. You just need the present value of investments and the initial value to calculate. This tool is perfect for short-term investment.

● However, this tool does not consider the tenure of the investment. As a result, ...
... it will not be giving you an indication of growth or decline. Plus, it makes the comparison between two mutual funds a taxing job.

What is the Compound Annual Growth Rate (CAGR)?

The compound Annual Growth Rate helps you to calculate the SIP by taking the tenure into consideration. The formula is as follows:

CAGR = [Final Investment Value/Initial Investment Value)^(1/n)] - 1
n = tenure of the investment

Pointers for CAGR:

● This calculation gives you an entire picture of the yearly average performance of mutual funds.

● It gives you an idea about the average growth and overlooks volatility. If there is a negative return or negative gain: CAGR will not indicate any of them.

● Though CAGR is apt for lump sum investment. It is not a preferred method of calculating SIP returns. If you want to use this method, you need to calculate the CAGR separately.

So now the question arises: what is the best method. The answer is the External Rate Of Return. This function helps you to calculate the return on mutual funds via SIP.

This method makes the SIP calculation easy. The formula is built in MS excel. You just need to simply type: XIRR (value, dates, guess)

In conclusion:

There are some amazing online SIP calculators and CAGR calculators, that will help you to analyse your investment easily. Use this calculator and find the best mutual fund for yourself.