How to Calculate SIP Returns

If you are putting your hard-earned money into a Systematic Investment Plan every month, you naturally want to know: How much will this be worth in 5, 10, or 20 years?

While doing the math by hand can be tedious, understanding the formula behind SIP returns empowers you as an investor. In this guide, we will explore the exact mathematical formula, explain the concept of XIRR, and walk through a step-by-step calculation.

The SIP Future Value Formula

The returns on a SIP are calculated using the compound interest formula for an annuity (a series of equal, regular payments). The mathematical formula used by financial institutions across India is:

FV = P × [(1+r)ⁿ − 1] / r × (1+r)

Let us define every variable in this equation:

• FV: The Future Value, which is the total accumulated corpus at the end of your investment period.
• P: The principal amount invested per month (your monthly SIP installment).
• r: The expected rate of return per month. Since mutual fund returns are usually quoted annually, you must divide the annual return by 12, and then by 100 to get the monthly decimal rate. (e.g., 12% annual = 12/12/100 = 0.01 per month).
• n: The total number of monthly payments. (e.g., 5 years = 60 months).

Step-by-Step Manual Calculation Example

Let’s assume you want to invest ₹10,000 per month in an equity mutual fund for 5 years at an expected annual return of 12%.

Step 1: Identify your variables

• P = ₹10,000
• Annual Return = 12%. Therefore, monthly rate (r) = 12 / 12 / 100 = 0.01
• Tenure = 5 years. Therefore, months (n) = 5 × 12 = 60

Step 2: Plug parameters into the formula

• FV = 10000 × [(1 + 0.01)⁶⁰ − 1] / 0.01 × (1 + 0.01)

Step 3: Solve the math

• (1 + 0.01)⁶⁰ = (1.01)⁶⁰ ≈ 1.8167
• 1.8167 − 1 = 0.8167
• 0.8167 / 0.01 = 81.67
• 81.67 × 1.01 = 82.4867
• Finally, 10000 × 82.4867 = ₹8,24,867

So, your total investment over 5 years is ₹6,000,000 (10k × 60), and your final corpus is approximately ₹8,24,867.

Understanding XIRR (Extended Internal Rate of Return)

When calculating historical SIP returns, you cannot simply use regular CAGR (Compound Annual Growth Rate) or Absolute Return percentages. Why? Because you did not invest all your money on day one.

In a SIP, every monthly installment is invested for a different duration. Your first ₹10k is invested for 60 months, but your last ₹10k is only invested for 1 month!

This is where XIRR comes in.

XIRR is a financial metric used to calculate the annualized yield of investments that have multiple cash flows occurring at irregular or regular intervals. It accurately measures the performance of your SIP by evaluating the duration each specific installment spent in the market. When you check your mutual fund portfolio app in India, the annualized return you see for your active SIPs is the XIRR.

Absolute Return Percentage

It is also vital to understand Absolute Return, which simply tells you how much money you made in total percentage terms, ignoring the concept of time.

• Formula: [(Current Value - Total Invested Value) / Total Invested Value] × 100
• From our example: [(8,24,867 - 6,00,000) / 6,00,000] × 100 = 37.47%

The Concept of the Wealth Multiplier

The longer you run the SIP formula, the more shocking the results become. In the first 5 years of the example above, you earned ₹2.24 Lakhs of wealth. But if you run that same ₹10,000 SIP for 20 years at 12%, the corpus grows to almost ₹1 Crore, even though your total investment was only ₹24 Lakhs.

This happens because the interest you earn begins to earn interest of its own, skyrocketing in the later years of the formula.

Why Use an Online Calculator?

While knowing the formula is great for financial literacy, manually calculating powers to the 240th degree (for a 20-year SIP) is prone to human error. Furthermore, factoring in things like annual Step-Up increments makes manual calculation incredibly tedious.

Using an online tool is significantly faster, guaranteed to be accurate, and allows you to instantly visualize different scenarios by adjusting sliders for rate, time, and amount.

Stop doing the math by hand. Try our wildly fast SIP Returns Calculator to instantly project your wealth journey!