Wondering how to analyze your SIP return? A quick guide..

Systematic investment plans (SIPs) are becoming a preferred mode of investing in markets for many Indian households. The SIP trend has picked up momentum, especially over the last few years, buoyed by a sustained rally post covid. The number of SIP accounts have increased from 5.27 crore in FY22 to 9.87 crore as of September 2024, shows data from Association of Mutual Funds in India (AMFI).

Investing through SIP is an efficient way to build a regular habit of investing not only for salaried individuals but also for anyone with a regular income. Many of you investing through SIP tend to withdraw your investments to meet emergencies. So while your inflows may be regular, outflows may be irregular. So how to calculate your SIP return in such a scenario?

Extended Internal Rate of Return (XIRR) is the apt formula to calculate your returns from SIP investments. XIRR takes into account the actual dates of cash flows, make it more accurate for real-world scenarios where investments could be irregular. Here’s an example of how to calculate XIRR on excel.

Calculating XIRR requires a series of cash flows which include both negative (SIP installment) and positive (withdrawal) cash flows. Along with cash flows, you also need the corresponding dates on which these cash flows occur.

Key things to remember:

• The outflows represent your SIP investment (-5000) denoted by negative sign as the money moves out of your account.
• On January 31, 2024, you withdraw the entire amount of Rs 48,000 from your portfolio. In excel cell, put = and type XIRR which shows XIRR formula. You will be prompted to put values and dates. Select the respective values and date columns. Enter and the result is your XIRR.

To conclude, XIRR gives you a more accurate picture of your SIP returns by considering the timing of each contribution and how long each installment was invested. XIRR calculation is useful when your investments have completed more than one year. For investments which have not completed one year, absolute return is more useful. While you don’t have to calculate the returns yourself as many online investment portals/apps and calculators which can provide XIRR calculation, it would be worthwhile to learn it in excel to understand the nuances.