How is SIP profit calculated?

A systematic investment plan or SIP as it is referred to as can be described as a mode of investment that enables you to invest a fixed sum of money in mutual funds over a period instead of making a one-time payment like is done in lump-sum payments. This mode is considered a systematic and structured way of investing a pre-determined sum of money on a regular basis. This action can be done either on a monthly, or semi-annual basis. Reaching your financial objectives might be possible if you invest consistently in this manner. A lot of financial advisors and experts are known for highly recommending mutual fund SIPs.

A systematic Investment Plan (SIP) is regarded to be a simple tool that also helps you to accumulate wealth over a longer investment horizon. Moreover, it is possible to do so with small investments that are carried out at regular intervals. This feature gives SIPs an edge over lump-sum investment plans. That’s because, with the latter, you can’t compromise the payment for mutual fund investments regardless of whether you have the required amount at your disposal or not. Also, SIPs are very affordable, and they don’t burn a hole in your wallet. Here are some of the advantages that are associated with opting for SIPs:

  • These plans are known for requiring less capital to start investing:

These plans are known for enabling you to invest in mutual fund schemes regardless of your limited earnings at regular intervals. Even if you were to start with ₹500 for investments, you can start your investment journey with the help of SIP. Thanks to this feature, you don’t need to worry about arranging for a large capital for the purpose of investments. Opting for SIPs might be a cost-effective approach to fund allocation every month without burning a hole in your wallet. With the help of the SIP step-up feature, you may raise or decrease your monthly investment amount as your financial condition changes.

  • These plans are known for making market timing irrelevant:

Market timing can be defined as the strategy in which you either decide to either buy or sell financial assets by trying to predict future market movements of the price. SIPs don’t require you to time the market. If you were to invest regularly and not stop investing when the markets are down, you might end up accumulating long-term wealth. This strategy tries to tackle one of the common issues that investors generally face. The said problems are the stock market volatility. That’s because the nature of market performance is cyclical. When the market bounces back, you might end up with higher returns.

  • These plans come with the benefit of rupee-cost averaging:

One of the major reasons to opt for systematic investment plans is that it is possible for you to avail the advantage of rupee cost averaging. With the help of this feature, you can avoid timing the market. Through this feature, you purchase more mutual fund units when stock markets correct themselves. On the contrary, you should purchase lesser units whenever the markets are on a bull run. Through the feature of rupee cost averaging, you get to average out the cost of your investment over time.

How does one calculate the returns on SIP?

The methods to calculate the returns generated in SIP are:

  • Absolute return:

For calculating point-to-point or absolute return on SIP, you need both the initial and current net asset value (NAV). This method computes the simple return that you could make on your initial investment. This is the formula for this method:

                                    (Current NAV-initial NAV)/initial NAV*100

  • Simple annualised return:

Also referred to as effective annual yield, in case the holding period is less than 12 months, you may require the method of annualised return. The formula for this method is:

                                    ((1 + Absolute Rate of Return) ^ (365/number of days)) – 1

  • CAGR (compounded annual growth rate):

The CAGR is known for providing the average annual growth rate of the returns. The returns can be calculated using this method if the holding period is over a year. The formula for this method is:

                                    (((ending value/beginning value)^(1/number of years))-1)*100

SIPs are known for simplifying the process of investing. That’s because by constantly investing through these plans, you might be able to accumulate more wealth than the one you might earn through the lump-sum mode of investment.