# SIP Interest Rate gauravc@orowealth.com SIP or Systematic Investment Plan allows one to invest a pre-determined amount at regular intervals. It not only promotes a disciplined approach towards investing but is also easy on the pocket. One can start investing in a mutual fund through a SIP of only Rs. 500. Additionally, with rupee-cost averaging and the benefits of compounding, SIPs have the ability to offer attractive returns in the long-run.

Calculation of return

There are multiple ways in which an investor can calculate the return on his/her investment. Read on to know more.

Absolute Return

Also known as point to point return, it helps to compute the simple return earned on the initial amount of investment. It is derived from two factors – initial investment (or NAV) and the current Net Assets Value (NAV).

The formula to calculate absolute returns is:

[(Current Net Assets Value Minus Initial Net Assets Value) divided by (Initial NAV)] * 100

For instance, Ms. A invests Rs. 10,000 in a fund. After four years, her investment value becomes Rs. 25,000. The absolute return in this case becomes 150% [(25,000 – 10,000)/10,000]

It is important to note that the “absolute return” calculation does not take into consideration the timeframe in which the returns have been earned. It only tells us how much has the investment grown, not how fast. In order to compare multiple investment tools and their earning potential, both factors (absolute growth and rate of growth) are equally important. Hence, it cannot be the sole yardstick to make an investment decision.

Simple Annualized Return

The formula for Absolute Return is used when the holding period is less than twelve months. If one wants to annualize the returns, one can refer to the below formula. Also known as effective annual yield, it is only an extrapolation.

[(Absolute Return +1) ^ (365/ Period of investment in days)] – 1

SEBI has mandated fund houses to refer to Absolute Return (when holding period is less than a year) and simple annualized return (when holding period is exactly one year)

Compounded Annual Growth Rate (CAGR)

Absolute Return does not show the complete picture if the period of investment is more than one year. In such cases, it is better to refer to CAGR to understand the growth in investment. It provides a more comparable and accurate returns percentage.

CAGR depicts the average annual growth rate and equalizes out the fluctuations in earnings over the period of investment. For example, if the CAGR value of a Fund (after 4 years) is 24%, it indicates that the fund has given an average return of 24% over the last four years. However, in reality, in those four years, the fund could have grown up in one year and fallen in another. CAGR normalizes all the volatility to tell you the yield over the specified timeframe, irrespective of the performance in individual years.

CAGR can be calculated as:

Step 1: Divide the investment value at the end by its value at the beginning.

Step 2: Raise the subsequent result to an exponent of one divided by the number of years.

Step 3: Deduct one from the result obtained.

If the holding period is in number of months, then raise the result obtained in Step 1 to (12 divided by number of months).  If the holding period is in number of days, then raise the result obtained in Step 1 to (365 divided by number of days).

One can also calculate CAGR by dividing Absolute Returns by the Investment period (in years)

It is important to note that returns (whether absolute or CAGR) remain the same in the first year. It is only after one year, that these two figures give different results.

Calculating returns in SIP (in excel worksheet)

In a SIP, one keeps accumulating fund units from the first SIP day. On the day of maturity or exit, the investor redeems the total units accumulated over the investment period and receives the maturity amount (i.e. NAV on the day of redemption multiplied by the number of units). In order to understand the return or yield that the investment has generated, one can take the help of Excel.

XIRR is a functionality available in Excel that helps to calculate the internal rate of return (IRR) or annualized returns for a schedule of cash flows taking place at irregular time periods. It gives the required information at the click of a button and does not even require too many data points including NAV. It only needs the following details:

• Value of SIP
• Dates of making investment and redemption
• Maturity amount

Steps to be followed in Excel

Step 1: In the first column, enter all the transaction dates (Say Column A)

Step 2: In the adjoining column (say Column B), enter all the SIP values. Outflows need to be recorded as a negative value. The last transaction date (or the maturity date) should have the maturity amount (since it is an inflow, it is recorded as a positive value)

Step 3: In another cell, enter the formula – XIRR (B1:B11, A1:A11) *100

(*This is assuming there were 10 SIP investments and 11th transaction is the maturity amount)

Now that you know the various ways in which you can calculate the return on your investment, you can assess which plans are generating the most wealth for you. After all every investor has one objective – to get the most out of your money! gauravc@orowealth.com

Gaurav is an engineer-turned-digital marketeer. Also a personal finance blogger with experience in financial planning and crowdfunding sector. He is a part of the Marketing team at Orowealth.

##### 1 Comment
• ##### Satyajit
Posted at 04:15h, 01 July Reply

Yes join