Your high school mathematics needs to be good while calculating SIP returns on your own. If you are investing in your SIP mutual fund scheme on a regular basis, like every month, then you might also need some effective tool for calculating your long-term returns over your investment.
An SIP investment occurs on some particular date and at regular intervals. When you are making the investment, you are offered a certain number of fixed units. The number would depend on the ongoing NAV (Net Asset Value) of the particular scheme at the specific time.
Over a certain period of time, you would succeed in accumulating a large number of the units. This is the reason why it has become difficult for finding out the exact returns you would earn over a certain period of time. This is due to the reason that every installment of the SIP mutual fund scheme might have been fared differently.
So how should one determine the performance of one’s SIP investment?
Absolute or Point-to-Point Return
This technique helps the investors in calculating simple returns upon their initial investment. For calculating the same, the investors would need the initial as well as the ongoing or the last NAV (Net Asset Value) of the particular SIP scheme. For calculating the absolute or point-to-point return, there is no role of the holding period. Therefore, in case your initial NAV was say, 20 INR and after a period of three years, it has become 40 INR, then the absolute or point-to-point returns would round off to 100 percent.
For calculating your returns with this technique, you just need to apply the formula as:
Absolute return = (current NAV – initial NAV) / initial NAV x 100.
One can put this formula on an excel sheet and then you can start your calculations. You can use the formula for calculating the returns while the holding time tends to be less than one year.
Simple Annualized Return
Some people might wish to annualize the overall return that is generated while the holding period tends to be less than one year. This technique is also known as the “effective annualized yield”. This is actually referred to as the extrapolation of the returns. This does not give the original picture. In case you wish to annualize the SIP returns, then you can use the following formula:
((1 + Absolute Rate of Return) ^ (365 / number of days)) -1.
One can put this formula into the excel sheet for calculating the returns.
Absolute return has been mandated by the SEBI (Securities and Exchange Board of India) to be simple annualized while the period tends to be less than one year.
CAGR (Compounded Annual Growth Rate)
When the tenure for your SIP investment tends to be more than one year, then CAGR can be a better way of calculating the returns. This usually depicts a figure that reveals the manner in which the investment should have grown if it had been generated as the steady return. However, in reality, the returns might not tend to be equal every year. Therefore, CAGR is used to represent the mean annual growth rate that tends to smoothen the volatility occurring in the returns upon a certain time period.
When you are using CAGR for calculating returns of your SIP investment, then you can use the formula as:
((( Ending Value / Beginning Value) ^ (1 / number of years)) – 1 * 100
Make use of these simple steps for calculating the returns on your SIP investment. Thus, you can analyze the growth of your investment in a better way. You can also use SIP calculators online, and prevent the headache of manual calculations.
