Understanding and Calculating Mutual Fund SIP Returns

When it comes to investing in mutual funds, one of the key factors to consider is the return on your Systematic Investment Plan (SIP). This article will provide you with a detailed guide on how to accurately calculate your SIP returns, along with practical examples and additional resources to help you make informed investment decisions.

What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan (SIP) is a method of investing a fixed amount of money in mutual funds on a regular basis, typically monthly. This approach allows investors to benefit from the power of rupee-cost averaging and build their wealth over time. Calculating the returns on your SIP is crucial to understanding the growth of your investment.

Manual Calculation of SIP Returns

The process of calculating SIP returns involves a few key pieces of information: your monthly investment amount, the number of months you have been investing, the current net asset value (NAV) of your mutual fund, and your expected annual rate of return (ARR).

Formula for Calculating SIP Returns

The formula to calculate the returns on your SIP investment is:

Returns (Current NAV - (Initial Investment Amount / (1 ARR)^(Number of Months - 1))) / Initial Investment Amount times; 100

Example Calculation

Scenario: Assuming you have been investing Rs. 5000 per month in a mutual fund for 10 years. The current NAV of your mutual fund is Rs. 100. Your expected annual rate of return is 12%.

Calculation:

Initial Investment Amount 5000 times; 12 times; 10 Rs. 600,000

ARR 12% or 0.12

Number of Months 10 times; 12 120

Current NAV Rs. 100

Returns (100 - (600000 / (1 0.12)^119)) / 600000 times; 100

Returns ≈ 19.99%

This means that your investment has grown by approximately 19.99% over the past 10 years. However, it is important to note that this is just an estimate and the actual returns may vary based on the performance of the mutual fund.

Using MS Excel to Calculate SIP Returns

For more accurate and efficient calculations, you can use Microsoft Excel. The formula for calculating the return on your SIP in Excel involves using the RATE function. Here are the steps:

Click on the Formula Tab in the toolbar at the top. Click on the Insert Function button. From the function list, select the RATE function. Input the following data: Nper: The number of months for which the SIP amount will be paid. Pmt: The monthly SIP value. Pv: The total value of your investment (if known). Fv: The expected value at the end of the SIP period (if known). Either input Pv or Fv, but not both. Press Enter to get the result, which is the return on your SIP. Convert it to a percentage.

For example, if you have been investing Rs. 5000 monthly for 120 months and the expected value at the end of the SIP period is Rs. 1,200,000, you would input:

Nper: 120 Pmt: -5000 Pv: 600000 Fv: 1200000

The result will give you the return on your SIP in decimal form, which you can convert to a percentage.

Calculating SIP Returns Using Internal Rate of Return (IRR)

For a more accurate calculation, especially when you are investing in instalments with different durations, the Internal Rate of Return (IRR) can be used. IRR is particularly useful in SIPs as it takes into account the timing of your investments.

To calculate IRR using spreadsheet programs like MS Excel or Google Sheets, you need the investment amounts and the dates on which they were made. Enter these values in columns, with dates and corresponding amounts. Then, use the IRR function:

IRR(investment_values, guess)

Where investment_values is an array of the cash flows (initial investment and subsequent monthly investments) and guess is an estimate for the IRR (optional). This will give you the return on your SIP in percentage form.

Additional Resources

To learn more about SIP return calculations, you can refer to the following articles:

How to Calculate SIP Returns - SIP Return Calculator - FinanciaL Mentor Understanding SIP Returns - Investopedia

By understanding and accurately calculating your SIP returns, you can make more informed decisions about your investments and achieve your financial goals more effectively.