A systematic investment plan, as defined by various investment experts, is an investment vehicle that allows 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 offered by banks; the only difference is in the rate of return. While recurring deposits have a fixed rate of return, say close to 9%, returns on SIP can range from 10% to 35% and more.

Calculating the returns of a SIP is a tedious task. However, MS Excel is a useful solution for users who want to know what they will get at the end of the investment term. To calculate SIP returns, start by entering a sum of $ 100 from row 1 to row 12. As the cost of purchasing SIP varies (due to fluctuation in cost price), a number of allocated units changes. Consequently. So, you get a different value under the heading ‘Market Value’ each time. The total of all market values ​​(= NAV * # of units) is the final amount you receive at the end of the SIP plan.

SIP takes the time value of money in the calculation. Money tends to lose its value over a period due to increased inflation. Therefore, to find out how SIP fares better than other investment alternatives, you can compare the IRRs of these. To understand the IRR, let’s first understand the NPV.

NPV stands for Net Present Value. The NPV tends to decrease at the same rate as that of inflation. It is believed that the NPV can reach zero over time. So the rate at which the NPV becomes zero is the IRR.

The formula for calculating SIP returns goes something like this:

NPV = NPV of the investment cash flow {Cash flow / (DR +1) ^ n}

NPV = net present value

Cash flow = cash value of the alternative investment

DR = discount rate (mainly inflation rate)

n = no. of years

The return on SIP investment is calculated using the IRR function. If you compare the IRR of a recurring deposit where the rate of return is constant, with that of SIP, you will find that SIP has a lower IRR than RD. Therefore, the performance of SIP is mostly higher than that of RD during a given period.

SIP has higher returns than fixed and recurring deposits. However, it is subject to a variety of market risks and burdens. However, if market risk is of concern, the investor can opt for a variety of SIP plans that invest more in debt markets than market-linked equities. So if you want to enjoy the benefits of market volatility without exposing yourself too much to risk, you can choose SIP over company stocks to invest in.

To conclude, if you are willing to take calculated risk, you should opt for systematic investment plans. All fund houses offer SIP yield calculators to see how much money you will get out of your savings.