Systematic Investment Plans, generally known as SIPs have become quite popular recently. These are one of the best financial instruments which aid in inculcating financial discipline in individuals along with providing them higher returns than most other investment options. Whenever an individual makes regular investments in a SIP, he gets more units during the period when the market is low and vice versa. This process averages out the purchase cost of the funds thus providing stable and positive returns over a period of time. This returns majorly depend on the risk-bearing capacity of the investor.

**Calculation of returns on SIP of mutual funds**

The process of computing the returns that an investor may earn on a SIP may appear complicated on various fronts to the individuals. One very common mistake that investors make while calculating the returns is of computing the Systematic Investment Plan returns on the investment amount of the entire period. Rather what must be done is that the installment amount should be taken only of the period for which it is invested. For such complexities, many banks and financial institutions provide the facility of an online EMI calculator. Investors who do not want to take the risk of inaccurate computations or want to save time can simply use such EMI calculators to make their tasks simple.

Let us take an example to understand how the returns on a SIP is calculated:

Assuming that the individual invests in a SIP of INR 1000 for 36 months. This means that he or she will be paying INR 1000 each month for the next 36 months.

During his manual calculations, the investor may take 1000 multiplied by 12 i.e. the number of months to calculate the returns. This, however, is the mistaken approach. What he or she should have done is to calculate the return on the first installment for 12 months, on the next for the remaining 11 months, and so on.

If the rate of return is 10%, then this should be computed individually for first month, second month, and so on i.e. 10% of 1000 = 100, 10% of 1000*11/12 = 91.67 up til 10% of 1000*1/12 = 8.33

All of these calculations can be dodged by simply using an online EMI calculator for free. This calculator not only provides the optimal EMI that shall be paid to minimize the rate of interest on the debts but also helps in comparing several SIP options depending upon various EMI limits.

Here are a few ways to calculate the returns on SIP of mutual funds:

**Absolute or Point-to-Point Returns:**Investors looking for calculating simple returns on their initial investments can use this method. One only need sth initial value of the fund and the NAV. In this method, the holding duration of the fund does not play any role. The formula is as follows: absolute return = (present NAV – initial NAV) / initial NAV x 100. To simplify the process, the investors can even do the calculations on an excel sheet or with the help of online calculators similar to EMI calculators.**Simple Annualised Return:**Certain investors choose to annualize their returns in case the holding duration is not more than 12 months. Also known as effective annual yield, this method is based on extrapolating the returns and not give an accurate and true picture of the returns. The formula to be used in such cases is: ((1 + Absolute Rate of Return) ^ (365/number of days)) – 1. The Securities and Exchange Board of India (SEBI) states that absolute return is useful when the period is less than 12 months and the simple annualized return is used when the period is exactly 1 year.**Compounded Annual Growth Rate:**For SIPs where the time duration is more than a year, the better way to calculate the returns is by using the CAGR method. CAGR is a number that depicts the potential wealth an investment might have produced had it been operational at constant returns. However, returns do not stay constant throughout the years. Thus the compounded annual growth rate shows the mean annual rate of growth that smoothens out the volatility in the returns over a period of time. The formula for CAGR is: =(((ending-value/beginning-value)^(1/number-of-years))-1*100**XIRR Method:**Inflows and outflows of cash are not evenly matched in most of the cases. XIRR is a function available in Excel that can be used for measuring the internal rate of return or annualized yield of cash flows occurring at irregular intervals. SIPs work well over along duration of time and the investment date, as well as the SIP amount, is prespecified by the investor.

The number of units is allocated to the investor depending on the current NAV of the fund, thus the investor should start collecting these from the very start of his investment. On the redemption date, the investor gets the maturity amount, which is the NAV of the redemption day multiplied by the total units he owns on the redemption day. To measure the returns, investors can use this XIRR function in excel