What is the Current Rate of Return on SIP?
Systematic investment plan or popularly known as SIP has made it extremely easy for investors to invest in stock markets in a disciplined manner. The investment tool – given the lowest investment ticket size is Rs 500 – provides access to professional portfolio management services to investors belonging to even the lowest rung of the society.
SIP also helps in averaging the cost as one invests a fixed amount of money at regular intervals even if the market trend is upward or downward. That means an investor will be getting more units of mutual funds when the market is falling while fewer units when the market is rising, assuming the SIP amount remains the same.
Interest rate on SIP
SIP is an investment tool that promises wealth creation. Though, how quickly or how much wealth will be created depends on multiple factors. This includes the economic condition of India, in which fund you are investing, the fund manager’s efficiency, the portfolio of stocks the fund owns, the duration of investment, etc.
Thus the current interest rate on SIP will also depend on where you are invested and for how long. All mutual fund schemes are mandated to publish their net asset value (NAV) every day. NAV is simply the market value of the stocks or bonds held by the mutual fund scheme. Hence as the stock price changes, NAV also keeps fluctuating.
As long as you know the NAV of the fund, you can easily calculate the current rate of interest it has accrued on your investment so far. Even though there are different types of calculators such as Online SIP Calculator and Compound Interest Calculator available online, you can also calculate your expected returns manually as given below.
Calculating interest rate on SIP
If you are aware of your average acquisition cost or average NAV of acquisition, the conventional method of calculating interest on investments such as absolute returns may work for calculating interest rate for less than one year of investment.
In such cases, all you need is the average NAV of the units you acquired when you bought them and the current NAV of the mutual fund scheme. The calculation is simple and is as follows:
Absolute return= ((Current NAV – average NAV)/ average NAV) x 100
Example:
Let us assume the average cost per unit in terms of NAV of your investments is Rs 15. The current NAV is Rs 30. The returns will be:
= ((30-15)/15) x 100
= 100%
This means your money has doubled.
However, absolute return is not the best way to calculate interest on SIP investment if the investment period is more than one year. That method will also not work if you do not know your average cost of acquisition per unit.
In such cases, an Extended Internal Rate of Return (XIRR), which is calculated using MS Excel or any similar software, is a better tool. XIRR, a variation of Internal Rate of Return (IRR) – another metric used in financial analysis – takes care of regular or irregular periodic investments and calculates cumulative returns on them.
To calculate XIRR, open a blank Excel worksheet. Enter the SIP transaction date in one column, and put the SIP amount as a negative figure against dates in the next column. You can name the columns Transaction Date and Cash Flow, respectively.
Assume that you are redeeming your SIP investment today. In such a case, you need to write down the redemption date and redeemed amount just below the last entry on both columns, respectively. If you have not redeemed it then you need to calculate the current value of investments, which can be calculated by multiplying the total number of units of mutual fund you own and the latest NAV of the fund.
In any cell, type ‘=’ and then XIRR. Press Tab to select the formula. When it asks to enter values, select all values from the cash flow column and then a comma, followed by all values from the Transaction Date column including the redemption date or today’s date. Close the parenthesis and multiply by 100. Hit Enter, and you will have the XIRR value.
