Take control of your investments in India by understanding how to calculate SIP returns manually. Learn the formula, factors affecting returns, and more.

SIP has been a recent trend for tax saving purposes and for youngsters to save their money. With a lot of exposure where one can self educate how to invest in SIP. They should understand how it is calculated. Manual calculations in SIP involve a little simple math but these days tools are handy! Let us understand how to invest discipline with the expected returns in this blog!

Understanding SIP Returns

The profits gained on investments made through SIP in mutual funds are known as SIP returns. The returns are computed based on the mutual fund scheme’s performance throughout time. Compounded Annual Growth Rate (CAGR) or annualised returns are the most common ways to express SIP results.

CAGR measures how quickly an investment expands over time while considering compounding. Compounding is the process of gaining interest in the investment’s income. Due to its consideration of the time worth of money, CAGR is a more accurate estimate of returns than simple returns.

Calculating SIP Returns Using the XIRR Function in Excel

The fastest and most practical method is using the Excel XIRR function to compute SIP returns. The Internal Rate of Return (IRR) for a sequence of cash flows that aren’t necessarily periodic can be calculated using the Excel function XIRR. The monthly investments the investor makes are the cash flows in the case of a SIP.

To compute SIP returns using Excel’s XIRR function, the subsequent actions must be taken:

Step 1: Enter each SIP instalment’s investment amount and date in one column and the corresponding NAV (Net Asset Value) of the mutual fund scheme in another column.

Step 2: Use the XIRR function in Excel to calculate the SIP returns. The syntax of the XIRR function is as follows:

=XIRR(values, dates, [guess])

The ‘values’ argument refers to the cash flows or investment amounts, the ‘dates’ argument refers to the dates on which the investments were made, and the ‘guess’ argument is an optional argument used to provide an initial guess for the IRR.

Calculating SIP Returns Manually Using the Formula

If you cannot access Excel, you can still calculate SIP returns manually using a simple formula. The formula for calculating SIP returns manually is as follows:

[(1 + r)n – 1] / r

Where,

r = monthly SIP return rate

n = total number of months of investment

To calculate the monthly SIP return rate, the following formula can be used:

[(Ending value / Beginning value) ^ (1/n)] – 1

Where,

Ending value = the current value of the investment

Beginning value = the total amount invested

n = total number of months of investment

Discover how to calculate SIP manually or use our mutual fund SIP calculator for quick calculations.

Example Calculation of SIP Returns Using the Formula

Let’s assume an investor has invested ₹ 5,000 per month in a mutual fund scheme for 5 years. The total amount invested is ₹ 3,00,000. At the end of 5 years, the value of the investment is ₹ 5,00,000. The total number of months of investment is 60.

To calculate the monthly SIP return rate, we can use the formula mentioned above:

[(Ending value / Beginning value) ^ (1/n)] – 1

[(5,00,000 / 3,00,000) ^ (1/60)] – 1 = 0.98%

Now that we have calculated the monthly SIP return rate, we can use the formula to calculate the SIP returns:

[(1 + r)n – 1] / r

[(1 + 0.0098)^60 – 1] / 0.0098 = 88.57%

Therefore, the SIP returns for this investment are 88.57%. This means that the investment has grown at a CAGR of 12.64% over 5 years.

Calculating SIP Returns with Different Investment Amounts and Tenures

The formula for calculating SIP returns manually can be used to calculate the returns for investments with different amounts and tenures. The only inputs that need to be changed are the total amount invested, the ending value of the investment, and the total number of months of investment.

For example, let’s assume an investor has invested ₹ 10,000 per month in a mutual fund scheme for 10 years. The total amount invested is ₹ 12,00,000. At the end of 10 years, the value of the investment is ₹20,00,000. The total number of months of investment is 120.

Using the formula mentioned above, we can calculate the monthly SIP return rate:

[(Ending value / Beginning value) ^ (1/n)] – 1

[(20,00,000 / 12,00,000) ^ (1/120)] – 1 = 0.56%

Using the same formula, we can calculate the SIP returns:

[(1 + r)n – 1] / r

[(1 + 0.0056)^120 – 1] / 0.0056 = 121.56%

Therefore, the SIP returns for this investment are 121.56%. This means that the investment has grown at a CAGR of 9.80% over 10 years.

Factors Affecting SIP Returns

Several factors can affect the SIP returns of an investment. Some of these factors are:

1. Investment Amount: The SIP investment quantity impacts the results produced. Although a more significant investment can yield more significant rewards, it carries a more significant risk.
2. Investment Tenure:  The investment’s tenure can also impact the returns produced. Compared to shorter-duration investments, longer-tenure investments often produce better returns.
3. Mutual Fund Scheme: The success of the mutual fund scheme in which the investment is made significantly impacts the returns that are produced.
4. Market Conditions: The returns generated are greatly impacted by the state of the market. Bullish markets produce higher returns, whereas lower returns may result from negative markets.
5. Expense Ratio: The returns produced might also be impacted by the mutual fund scheme’s fee ratio. Lower returns may result from an increased expense ratio.

Conclusion 

Manually Calculating SIP returns is important to assess asset performance. Though tools like Excel’s XIRR function exist, understanding the formula and variables influencing returns is valuable. Investors can make informed decisions and optimize investments by carefully observing returns. Vakilsearch can assist in calculating SIP returns, offer personalized investment advice, and help diversify portfolios for maximum returns. With Vakilsearch‘s support, investors can achieve their financial goals. 

Also, Read:

• Difference Between SIP and FD
• Know About SIP Investment
• Best Time to Invest in SIP