How the SIP Calculator Helps You Assess Your Mutual Fund SIP Returns

March 16, 2023 Mutual Fund

In 2023, global markets are cladding ongoing challenges such as looming recession, high inflation, an unresolved dispute between Russia – Ukraine and various uncertainty. As a result, these factors consequently affect market performance and cause significant volatility.

Have you ever seen surfboarders effortlessly ride the rough ocean waves? that is because they have mastered the art of surfing. Similarly, to deal with market volatility, investors must perfect the art of investing.

However, is there an easier way to beat volatility? Certainly, there is a technique that can help novice investors’ save their wealth from eroding and even out the effects of a volatile market. Systematic Investment Plans (SIPs) are an effective option for investors to invest in highly volatile markets. Investors need to be aware that volatility is part of the essence of the market. It is impossible to time your investments in mutual funds correctly. You will be utterly let down if you try to time the market, and your returns may suffer due to wrong timing.

Hence it is better to invest regularly through the highs and lows of the market by investing through a SIP with a clear focus on your goals. You need not worry about market volatility since the cost of your investments will average out over a period. There are two ways to invest in a mutual fund. You can invest by either making a lumpsum investment or setting up a Systematic Investment Plan (SIP) for regular investments.

Whether you are investing in mutual funds through a lumpsum or SIP, you all would want to invest in mutual funds that can give expected returns. But have you wondered how mutual fund returns are calculated? And does the calculation differ between lumpsum investments and SIP investments?

There are different ways to calculate your mutual fund returns, including CAGR, XIRR, absolute returns, etc. In this article, you will look at how you can assess your mutual fund SIP returns.

With mutual fund SIPs, there are several investments made at varying NAVs on various dates. Since the SIP’s sequence of instalments and fluctuating NAVs connected with each instalment, calculating returns can be slightly more complex. Hence, there are two ways to calculate the effective return – either calculate the CAGR of each investment or apply the XIRR (Extended Internal Rate of Return) formula.

Many of you invest in mutual funds using SIPs, which is one of the most popular ways to do so today and is thought to be one of the finest ways to benefit from rupee cost averaging and the power of compounding. But while calculating SIP returns, XIRR is the ideal method.

What is XIRR in mutual funds?

XIRR is an Extended Internal Rate of Return. It is a method used to calculate returns on investments where multiple transactions occur at different points in time. XIRR helps you to evaluate the actual returns on your investment. It factors all the aspects of every SIP instalment, including the instalment amounts, the instalment dates, the investment maturity date, the cash inflows, and outflows. In XIRR, the CAGR of each instalment is calculated, and then they are added together to give you the overall Compounded Annual Growth Rate.

There is a step-by-step process that investors can follow to calculate XIRR in MS Excel. Using the XIRR formula will help you calculate the actual return on your investments in a better way.

[Read: How to Use XIRR While Calculating SIP Returns]

Although the XIRR method for calculating mutual fund SIP returns is the most comprehensive way of determining your returns, it is much more complex for many investors. Not all investors are savvy in such complex calculations, nor do many have time to draw down the XIRR formula. Thus, Using an online Systematic Investment Plan (SIP) Calculator to calculate SIP returns could make this task less complex for you.

What is a SIP Calculator?

A SIP Calculator, also known as a SIP Return Calculator, estimates the returns on mutual fund investments made through the SIP route. It helps you select how much you want to invest, examines the entire amount you have invested, and displays an estimated return value.

SIP calculators are designed to give potential investors a heads-up on their mutual fund investments. However, the actual return from the mutual fund scheme varies depending on several factors. The SIP calculator does not account for the exit load and expense ratio (if any). It is an online tool to calculate the SIP amount to achieve your financial goals based on an expected annual return.

Many individuals can develop their SIP calculator in MS Excel, but using the free SIP Calculator offered on various fund house portals and/or fintech applications makes it easy for you, the investor. It saves time by eliminating the need to perform complex computations.

How does the SIP Calculator work to assess your mutual fund SIP returns?

A SIP plan calculator works by the values entered by the users. All you have to do now is enter the amount you want to invest each month, select the number of years you want to save for the expected return percentage, and the SIP calculator will do the rest.

Here’s PersonalFN’s SIP Calculator:

As you can see from the image above, by simply entering a few details, you can use this calculator to plan your significant financial goals, such as purchasing your dream car, financing your wedding, leading a happy retirement, etc. While saving you time, this works similarly to MS Excel’s XIRR formula and produces the same outcomes. With just one click, the SIP calculator will instantly compute the maturity amount of your investments. To better understand how the SIP calculator calculates the future value of returns for your ongoing SIP, let’s look at an example.

Mr A is prepared to begin a monthly SIP of Rs. 10,000 in order to purchase a car within the next 5 years (60 months), with an expected return of 10% p.a.

(Source: PersonalFN Research)
This is for illustration purpose only 

The SIP calculator shows that Mr A will receive Rs 7.80 lacs when their SIP investments mature, as seen in the above image. The return produced by Mr A’s SIP investments over the years, assuming the market has delivered returns at 10% p.a., is Rs. 1.80 lacs, while the cost of the investment is Rs. 6 lacs in 5 years.

As a result, an investor can predict the future value of returns on their SIP using a SIP calculator. Most SIP return calculators offer the option to enter the rate of inflation while computing in case you need to double-check the calculation with inflation. Using this SIP calculator, you can plan your envisioned financial goals, enabling investors to make an informed investment decision.

To conclude…

SIPs are a better approach to investing in mutual funds than lumpsums, especially if you have important goals like funding a child’s higher education, their wedding, or your own retirement needs that require regular investments.

However, keep in mind that while SIP Calculators may enable you to predict the return on mutual fund investments made through SIP, it is essential to start out by making investments in worthy mutual fund schemes. You will only be able to produce better risk-adjusted SIP returns by investing in the best mutual fund schemes based on your risk profile, investment horizon, and alignment with your financial goals.

This article first appeared on PersonalFN here