SIPs are the perfect investment options that allow individuals or investors to pool a fixed amount of money in mutual funds to make their future safe.

Investing in SIPs is not only an easy way but also a smart way of investing your money. Doing so helps investors achieve their long-term financial objectives easily. However, one common question that arises among investors is what they can expect in terms of returns on SIPs. So, let’s explore all about average returns on SIP returns in detail.

What is a SIP Calculator?

A Systematic Investment Plan calculator is a tool that helps people estimate the future value of their investments done through SIPs in mutual funds. Users input details like their investment amount, duration, and expected rate of return.

The calculator then computes the potential wealth accumulation over time, considering the regular investment pattern of SIPs. It simplifies financial planning by offering insights into the expected returns, aiding investors in making informed decisions. This tool proves helpful for individuals aiming to achieve specific financial goals through disciplined and gradual investment strategies in mutual funds.

How does the SIP Calculator Work?

The SIP (Systematic Investment Plan) Calculator makes investment calculations easy. Users input key details like the amount they want to invest monthly, the investment duration, and the expected annual rate of return. The calculator then uses all the above inputs to determine the investment's future value. It applies a formula that determines the compounding effect, which means the returns can be reinvested and used to earn additional returns in subsequent periods.

For example, suppose you invest a fixed amount each month. In that case, the SIP Calculator shows you the actual growth of the investment over time. It helps you understand how even small, regular contributions can accumulate into a significant sum. This user-friendly tool empowers investors by offering a clear picture of the expected return on investment, assisting them in making the best decisions about their financial goals.

How to Calculate Rate of Return on SIP?

Calculating the average rate of return in SIP is essential to measure your investments' performance. It's a simple process that helps you understand your money's daily growth.

To find the return rate, subtract the initial amount the individual invested from your current value. Then, divide this difference by the initial investment and multiply by 100 to get the percentage return.

Return Rate=(End Value- Invested Amount / Invested Amount)×100

Absolute Return

Absolute return is a straightforward way to measure an investment's total gain or loss without considering the time factor. It gives you a clear picture of your investment's actual monetary increase or decrease, expressed as a percentage of the initial amount you invested.

Formula to calculate the absolute return

Absolute return = (Current NAV- Initial NAV)/ Initial NAV*100

This formula is used when the holding period is less than 1 year.

For example:

Absolute return is a straightforward measure of investment performance, exemplified by a scenario where an investor initially puts INR 1,000 in the fund. After one year, the investment grows to INR 1,200; the absolute return is Rs.200 (Rs. 1,200 - Rs. 1,000)* 100, representing a 20% gain. Conversely, if the investment depreciates to Rs. 900, the absolute return would be -Rs. 100 (Rs. 900 - INR 1,000), showing a 10% loss.

Compounded Annual Growth Rate

CAGR calculates an investment's average annual growth rate while determining the compounding effect. In addition, it also smoothes out fluctuations, perfectly representing an investment's performance.

To find the CAGR, divide the end value of the investment by the initial investment, raise the result to the reciprocal of the number of years, and subtract 1 .

CAGR Formula

CAGR = (End Value of Investment/Initial Value of Investment) ^ (1/No. of Periods) – 1
CAGR is useful for understanding how an investment grows annually on average, providing a standardized way to compare returns across different time frames.

XIRR

It is used to find ROI with irregular cash flows, making it especially useful for evaluating Systematic Investment Plans (SIPs). Unlike simple returns, XIRR considers both the timing and the number of cash inflows and outflows.

For SIPs, where you invest regularly over time, XIRR provides a more accurate picture of your average annual return. It considers your investments' specific dates and amounts, making it ideal for scenarios where your contributions may not be consistent.

To calculate XIRR, you need the dates and corresponding cash flows (investments and withdrawals). XIRR then determines the discount rate that equates the present value of these cash flows to zero. In simpler terms, it finds the average annual rate of return that accounts for the irregular timing of your SIP transactions.

Using XIRR, investors can get a more realistic measure of their returns on SIP, factoring in the changing investment amounts and intervals. It's a powerful tool for those seeking a precise way to evaluate the performance of their investments in situations where cash flows are not uniform.

The Bottom Line

Understanding the average SIP returns is essential for investors seeking financial growth. Individuals can make informed investment decisions by mastering absolute return, CAGR, and XIRR calculations. So, no matter what type of investor you are, the above concepts help you explore the complex world of finance, ultimately paving the way for a more secure and safe financial future.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.