Systematic Investment Plan (SIP) is a smartest mode of Investment in Mutual Funds. An Investment through SIP gives definite good returns in longer run. Some people merely see the appreciated value of NAV and think they earned good return. However the SIP returns are calculated differently because of periodic investment involved. It is always recommended to use genuine SIP calculator to find return on your investment. Here i will describe with detail formulation how actually the return is calculated on a SIP investment. Also provided here with an online SIP Return Calculator in which return on any mutual fund can be calculated.
How SIP works??
In SIP, every month a fixed sum of money is invested in a particular mutual fund as per our choice. Now, every month some units of mutual fund is purchased depending upon the Net Asset Value (NAV) on that date. As Market grows the NAV also increases similarly as market sinks the NAV decreases, during total period of investment the mutual fund units are purchases at various NAV. At the end of investment period the units are sold at higher value of NAV, which is also called as redemption value.
Total Fund value = NAV x Nos of Units + Dividend
How to Calculate Return on SIP Investment
SIP investment is periodic and fixed, whereas Return varies depending upon the market conditions. Also the return on invested amount in one month is reinvested for next month i.e the return in SIP investment is compounded. If any dividend is paid in during investment period then it is added to Return on investment.
Now let us suppose the SIP of Rs ‘P’ is started for a period of ‘n’ months.
Let us assume the average return for one month investment is ‘r’
Now every month’s investment will grow and will give a some return at the end of months. The below table will give the formula for the every months investments.
After completion of month the total fund value will be equals to the sum of values in column of above table. i.e
Reversing the order of above series will give a geometric progression.
Taking common factor out.
Since formula for sum of Geometric Progression is: , where a is common ratio.
The total Fund value of SIP investment will be,
Where as the actual Fund value after period is
Now Equating both the equations
From the above equation we come to conclusion that there will be no direct equation to calculate the rate of return of SIP investment. The actual Rate of Return will be the arrived by trial and error, changing the value of ‘‘ to make LHS=RHS. The below SIP Calculator is based on the above calculations. Here the Rate of return is varied using a slider to make LHS=RHS.
Online SIP Return Calculator