• HDFC
• 26 Jul 2018
• Systematic investment plan SIP

HDFC, Tester

Let’s assume that you have taken stock of your finances and fixed a financial goal for yourself. You have decided to invest in a mutual fund – through SIP. You obviously want to know how your portfolio is shaping up. In this situation, a formula that helps you calculate the probable returns can come in handy. You can start calculating estimated returns by gaining an understanding of the basic mathematics, in order to apply certain formulae.

 

This is simpler than it looks. Here is guide to the different ways in which you can calculate your returns on mutual fund investments.

 

1. Point-to-point or Absolute Return:

This formula helps you to calculate the simple returns on your initial investment. In order to do so, you simply need to know the starting and the latest net asset value (NAV). This formula can be used to calculate returns when the holding period is less than 12 months. You can use the following formula.
Formula: Absolute return = {(Current NAV – Initial NAV)/ Initial NAV} x 100

 

2. Simple Annualized Return:

Sometimes, when the holding period is less than a year, people may wish to see what their return might be at the end of the year. This is called annualizing. You may input the following formula in excel sheet to calculate your estimated returns. For calculating a simple annualized return, you can use the following formula.
Formula: Annualized Return = (1+ Rate of Absolute Return) (365/no. of holding days) – 1

3. Compounded Annual Growth Rate (CAGR): 

CAGR is a more effective way to calculate your returns if the duration of your SIP investment is more than a year. This method shows you the growth of your investment had it generated a constant return. Realistically though, returns may or may not be the same every year. Therefore, CAGR shows a mean annual growth rate that smoothens out the volatility in returns over a duration of time.
Formula: CAGR = (Ending Value/Starting Value) (1/ No. of year) – 1

4. Total Returns: 

The Point-to-Point method can be limited at times. In order to bypass those limitations, you can use the Total Returns method. This concept adds the dividends that are distributed during the holding period, to the absolute change in the NAV, and dividing it by the NAV on the starting date.
Formula: Total Return = [{Dt + (Current NAV – Initial NAV)}/ Initial NAV] x 100; where Dt is dividend received per unit.

 

5. XIRR:

And finally, while the above tools help you to calculate returns on lump sum investments, if you choose to take the SIP route for your investments, then you can easily calculate your returns on Microsoft Excel. You can use the XIRR function in Excel for calculating internal rate of return or annualized yield for a schedule of cash inflows at irregular intervals. In order to use this function, you do not even need the NAV for any date. What you need is SIP amount, dates of SIP investments, date of redemption and the amount received upon redemption.

 

Now, follow these steps:

 

• Open Excel
• In Column A, enter the transaction dates on the left side
• In Column B, enter SIP figure (let us say X), but with a minus sign since its an outflow. Therefore, - X
• Enter redemption amount in Column B (let us say Y), against the redemption dates in Column A
• In the box below the redemption amount, Y, type in this formula: =XIRR (B1:B7, A1:A7)* 100 and hit enter.

This will show you the returns on your SIP investments.