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## How to Calculate Returns for a Systematic Investment Plan?

A systematic investment plan, defined by various investment experts, is an investment vehicle that allows investors to pay equal amounts at regular intervals into a mutual fund plan of their choice. This is very similar to the recurring deposit schemes offered by banks; The only difference is the rate of return. While recurring deposits have a fixed rate of return, say close to 9%, returns on SIPs can vary from 10% to 35% and above.

Calculating returns on SIP is a difficult task. But, MS Excel comes as a useful solution for users who want to know what they will get at the end of the investment period. To calculate the return on SIP, start inputting the sum of $100 from line 1 to line 12. The cost of buying a SIP varies (due to fluctuations in cost price), the number of units allotted changes accordingly. So, you get a different price each time under the heading ‘Market Price’. The sum of all the market values (= NAV * number of units) is the final amount you get at the end of the SIP plan.

SIP takes time value of money into account. Money tends to lose its value over time due to an increase in inflation. So, to know how SIP fares better than other investment options, you can compare the IRRs of these. To understand IRR, let’s first understand NPV.

NPV stands for Net Present Value. NPV declines at the same rate as inflation. It is believed that the NPV value can approach zero over time. Therefore, the rate at which NPV becomes zero is IRR.

The formula for calculating returns in SIP goes something like this:

NPV = NPV of cash flow on investment cash flow / (DR +1)^n

NPV = Net Present Value

Cash flow = cash value of investment option

DR = discount rate (mostly, inflation rate)

n = no. of the year

The return on SIP investment is calculated using the IRR function. If you compare the IRR of Recurring Deposit where the rate of return is constant, with SIP, you will find that SIP has a lower IRR than RD. Hence, returns on SIP are higher than RD for a given period.

SIP has higher returns than fixed and recurring deposits. However, it is subject to different types of loads as well as market risk. However, if market risk is a concern, an investor can go for various SIP schemes that invest more in debt markets than market-related equities. So, if you want to enjoy the benefits of market volatility without exposing yourself too much to risk, you can choose SIP in company stocks for investment.

To conclude, if you are willing to take calculated risk, you should go for systematic investment schemes. All fund houses provide SIP return calculators to see how much money you will earn from your savings.

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