Understanding mutual fund returns or sip returns might seem tricky due to terms like Absolute returns, CAGR, and XIRR. When we encounter such big words, it can feel overwhelming and discourage us from delving deeper into the topic. But don’t worry, we’re here to tell you that it’s not as complex as it seems!
Investing in mutual funds can be done in two main ways. One way is to make a lump sum investment, which involves putting in a larger amount all at once. The other option is to choose a Systematic Investment Plan (SIP), where smaller amounts are invested regularly at fixed intervals, usually monthly. Calculating the returns for these two approaches can be tackled differently.
For lump sum investments, we often use Absolute Returns and the Compounded Annual Growth Rate (CAGR). Absolute Returns give us a simple profit or loss number, while CAGR provides a more complete picture by factoring in the effects of compounding. However, these methods fall short when it comes to calculating SIP returns, which involve varying intervals and investment amounts.
In this article, we will learn how to calculate sip returns with a method called XIRR – Extended Internal Rate of Return. This approach takes into account the irregular intervals and different investment amounts associated with SIPs.
understanding mutual fund sip returns
When navigating the intricacies of mutual fund SIP returns, it is essential to seek sound investment advice. Understanding the historical performance, risk factors, and market trends can empower investors to make informed decisions, ensuring the potential for long-term financial growth.
Using the CAGR method to figure out SIP returns can be misleading. CAGR is well-suited for lump sum investments but when it comes to SIPs, CAGR doesn’t factor in periodic investments. CAGR assumes that investments occur at once, and it only considers the initial and final values for its calculation. This isn’t the case with sip investments. Since SIP involves putting in money at different times and amounts, using CAGR can hide the real picture of returns. Also, CAGR doesn’t consider how the irregular timing affects the compounded growth!
formula to calculate sip returns
As we mentioned above, an effective sip return calculator is XIRR. XIRR stands for Extended Internal Rate of Return. Unlike CAGR, XIRR excels when dealing with situations where investments show different intervals and amounts. XIRR takes into account the date and value of each investment, adjusting for these variations to give an accurate annual return rate.
XIRR shows how much an investment grows each year, taking into account when and how much money is invested. It’s a crucial tool for assessing SIP returns because it captures the intricacies of SIP investments.
In simple terms, this method calculates the overall return by adding up the growth rates of each instalment using a special mathematical function in Excel.
Another advantage of using this method is its simplicity in calculating SIP returns. The formula for this calculation is already integrated into MS Excel. All you have to do is use the right formula by typing: =XIRR (values, dates, guess)
Now let’s explore how sip is calculated with a simple example. Let’s suppose an investor puts in 5,000 rupees every month for a year through SIP investments. And after a year the investor redeemed a total amount of 59,000 rupees. Now, let’s organize all the information in an Excel sheet and note down the formula that will help calculate the return.
A | B | |
| 1 | SIP Date | SIP Amount (in Rupees) |
| 2 | 1-9-2022 | -5000 |
| 3 | 1-10-2022 | -5000 |
| 4 | 1-11-2022 | -5000 |
| 5 | 1-12-2022 | -5000 |
| 6 | 1-1-2023 | -5000 |
| 7 | 1-2-2023 | -5000 |
| 8 | 1-3-2023 | -5000 |
| 9 | 1-4-2023 | -5000 |
| 10 | 1-5-2023 | -5000 |
| 11 | 1-6-2023 | -5000 |
| 12 | 1-7-2023 | -5000 |
| 13 | 1-8-2023 | 59000 |
| 15 | SIP Returns (XIRR) | =XIRR(B2:B13,A2:A13,) |
A | B | |
| 1 | SIP Date | SIP Amount (in Rupees) |
| 2 | 1-9-2022 | -5000 |
| 3 | 1-10-2022 | -5000 |
| 4 | 1-11-2022 | -5000 |
| 5 | 1-12-2022 | -5000 |
| 6 | 1-1-2023 | -5000 |
| 7 | 1-2-2023 | -5000 |
| 8 | 1-3-2023 | -5000 |
| 9 | 1-4-2023 | -5000 |
| 10 | 1-5-2023 | -5000 |
| 11 | 1-6-2023 | -5000 |
| 12 | 1-7-2023 | -5000 |
| 13 | 1-8-2023 | 59000 |
| 15 | SIP Returns (XIRR) | =XIRR(B2:B13,A2:A13,) |
After putting the formula (=XIRR(B2:B13,A2:A13,) we get the SIP return rate of 14.93 percent.
how to calculate mutual fund sip returns?
To understand how to calculate mutual fund return using the XIRR method, you need to follow the following steps:
Step 1. Data Collection:
Gather all the information about the dates of investment and the corresponding amounts. This data might be available from your investment statements or online investment platforms.
Step 2. Data Arrangement:
Once you have compiled the necessary data, it’s time to organise it effectively. Arrange this collected data in an Excel sheet. Write down the SIP dates on the left-hand side. Then, record the deducted amount for each month on the right-hand side. Be sure to include a minus sign before the amount to indicate it as an outflow.
Step 3. Add the Redemption Information:
When you reach the end, remember to mention the redemption date and the total received amount. Unlike earlier deductions, for inflow amounts, there’s no need to use a minus sign.
Step 4. XIRR Function:
In Excel, select a cell where you want the XIRR result to appear. Then, use the XIRR function. Enter the formula “=XIRR (amount, dates, guess)” in the designated cell, and leave the “guess” part blank.
Step 5. Compute XIRR:
Allow Excel to calculate the XIRR, revealing the annual return rate for your SIP investment.
