How to Calculate Returns for a Systematic Investment Plan?
[ad_1]
A systematic investment plan, as defined by various investment experts, is an investment vehicle that allows the investors to pay equal amounts at regular intervals to the mutual fund scheme of their choice. It is quite similar to the recurring deposit schemes that banks offer; the only difference being in the rate of return. While recurring deposits have fixed rate of return, say close to 9%, returns in SIP may vary from 10% to 35% and beyond.
Calculating returns on an SIP is a tedious task. But, MS Excel comes as a handy solution to the users who want to know what they will get at the end of the term of the investment. To calculate returns on SIP, start inputting a sum of $100 from row 1 to row 12. As the cost of buying SIP varies (because of fluctuation in cost price), a number of units allotted changes accordingly. So, you get a different value under the head ‘Market Value’ each time. The total of all the market values (= NAV * no. of units) is the final amount you receive at the end of the SIP plan.
SIP takes time value of money in the calculation. Money tends to lose its value over a period due to rise in inflation. So, to know how SIP fares better than other investment alternatives, you can compare IRRs of these. To understand IRR, let’s first understand NPV.
NPV stands for Net Present Value. NPV tends to decrease at the same rate as that of inflation. It is believed that NPV may reach the value zero over the course of time. So, the rate at which NPV becomes zero is IRR.
The formula for calculating returns on SIP goes something like this:
NPV = NPV of Cash Flow in investment{Cash Flow / (DR +1)^n}
NPV = net present value
Cash flow = cash value of the investment alternative
DR = discount rate (mostly, inflation rate)
n = no. of years
Return of SIP investment is calculated using IRR function. If you compare IRR of a recurring deposit where the rate of return is constant, with that of SIP, you will find that SIP has lower IRR than RD. That is why, return on SIP is mostly higher than RD for a given period.
SIP has higher returns than fixed and recurring deposits. But, it is subject to a variety of loads as well as market risks. However, if market risk is of concern, then the investor can go for a variety of SIP plans that invest more in debt markets than the market-linked equity. So, if you want to enjoy the benefits of the volatility of markets without exposing too much to the risk, then you can choose SIP over company stocks for investment.
To conclude, if you are willing to take a calculated risk, you must go for Systematic Investment Plans. All fund houses provide SIP returns calculators to find how much money you will be making from your savings.
[ad_2]
Source by Kunal Agrawal
