Investing is one of the most important financial tools that you can have to achieve your financial goals. It is the act of saving money and putting it to work to generate returns. Investing can be used to save for short-term goals like paying off debt, buying a car, or paying for education, or it can be used for long-term goals like retirement or children’s college education. The most important thing is to invest what you can afford to lose. SIPs are an infamous investment technique used by millions of investors.
A SIP is a set of pre-defined investment instructions, offered by a mutual fund, to an investor to invest a fixed amount of money at pre-defined intervals in the selected mutual fund scheme. An investor can choose a SIP tenure that is suitable for him or her. For example, an investor can choose to invest a fixed amount of money every month in the same mutual fund scheme or a SIP can be invested over a few years. A SIP is beneficial for investors who have a fixed income and want to invest in a mutual fund but do not have enough time in the market to select the right mutual fund scheme for them.
The main benefit of SIP is that it is a hassle-free investment plan. It is an investor-friendly plan as it does not involve a lot of paperwork and documentation.
SIPs offer a fixed monthly or yearly income and investors do not have to worry about the markets and their fluctuations. SIPs are also beneficial for investors who are new to the stock market and do not want to take the risk of investing large amounts at a time.
SIP returns are calculated using various methods. A mutual fund calculates its SIP returns by investing the SIP money in the same mutual fund scheme. The calculation methods for SIP returns are based on various assumptions such as interest rates, inflation, equity markets, etc. The mutual fund calculates its SIP returns using some methods and then returns this amount to the investor.
Thus, below are some of the methods on how to calculate SIP returns.
Absolute Return or Point to Point Return
This is the total return excluding the cost of the fund. This is the return on investment, before the cost of investing.
The absolute return is calculated using the following formula: (Total return – the cost of investment) ÷ Cost of investment x 100%. Absolute return is a simple way to calculate the total return on your investment in a mutual fund. It is the total return of the fund, before accounting for the cost of investing in the fund.
Annualized Return for SIPs
This is the total return of the fund over a year, calculated using a formula. This is the calculated annual return for the investment in the fund for one year, calculated using the cost of investing in the fund for the current year and the cost of investing in the fund for the previous year. This is a simple calculation used to calculate the annualized return for SIP.
Compound Annual Growth Rate (CAGR)
The Compounded Annual Growth Rate (CAGR) of an asset is the average annual growth of its value over a fixed period. For example, if an asset’s value increases by 10 percent per year for 10 years, it would have a CAGR of 10 percent for those 10 years. CAGR is not a mathematical equation, but a term used to determine how an investment or portfolio has performed over a specified period. This is often used to determine how much an investment will grow or decline over a set period.
Extended Internal Rate of Return (XIRR)
Extended Internal Rate of Return (XIRR) is a measure of the return on investment. It is calculated for a specified period based on a series of interest rates. The XIRR of an investment is typically expressed as an annual rate, using a specified capitalization rate and the period. The advantage of XIRR is that it is not affected by timing differences within one period because XIRR is an annualized form of return.
The methods used to determine how to calculate SIP returns are usually based on some form of calculation or assumption. The benefit of using a SIP over other investments is that your returns will be based on the same calculation and assumption, which will not change over time. This makes it easier to compare your returns over time, as your returns will be the same regardless of what calculation or assumption was used to calculate your returns.
SIPs are also beneficial for investors who want to invest a fixed amount every month or year, without worrying about the market. Moreover, the SIP is a simple investment plan that offers fixed returns to investors. The SIP plan is beneficial for those investors who do not have enough time or knowledge to select the right mutual fund scheme for their investment needs.
Also Read: How does the SIP calculator work?
