Systematic Investment Plan (SIP) is one of the best methods to invest for a specific period of time by contributing smaller amounts instead of a lump sum payment, the reason it is the most popular type of investment amongst people. However, calculating the annual returns from SIP investments is a bit tricky. Though there are SIP calculators available online which can give the exact figures, one can even use manual calculation methods to find out the annualized return amount.
Here we explain how a few simple methods can ease up this calculation game to some extent:
1. Point-to-Point or Absolute Return
The current Net Asset Value (NAV) is required to calculate point-to-point or absolute return. This type of calculation does not require the holding period.
The formula used for calculating absolute return: (Current NAV-initial NAV)/initial NAV*100
2. Simple Annualized Return
For investments bearing a holding period of less than 12 months, simple annualized return needs to be calculated.
The formula used for calculating simple annualized return: ((1 + Absolute Rate of Return) ^ (365/number of days)) – 1
3. Compounded Annual Growth Rate (CAGR)
The CAGR calculator helps in giving the average annual growth rate of the returns. The returns can be calculated by the CAGR method if the holding period is more than a year. The returns though may vary from year to year.
CAGR formula: (((ending value/beginning value)^(1/number of years))-1)*100
4. XIRR Method
XIRR or extended internal rate of return can be used for investments made in SIPs. As the amount that is invested via SIPs vary, one can follow the XIRR method to calculate annualized yield or internal rate of return for irregular cash flows. It can be implemented to find out the returns of multiple transactions denominating different amounts.
To check out the calculations automatically one can use mutual fund sip calculators which are available on many online platforms that ease up the task of doing calculations manually.
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