How SIP returns are calculated (with examples)

A SIP (Systematic Investment Plan) puts a fixed amount into a mutual fund every month. Working out what it will be worth is not as simple as applying one growth rate to the total you invested. This guide shows the exact method, with numbers you can check on the SIP calculator.

Mutual fund investments are subject to market risks. Every figure below is a projection at an assumed steady return, not a promise.

Why does each SIP instalment grow differently?

Your first instalment stays invested for the whole period. Your last one is invested for only a month. So each instalment compounds for a different length of time.

Take ₹10,000 a month for 15 years at 12% a year, which the calculator treats as 1% a month:

The first ₹10,000 grows almost six times. The last barely moves. Your SIP value is the sum of all 180 of these separate amounts. That’s why early instalments do most of the work, and why starting a few years earlier matters so much.

What is the SIP future value formula?

Adding up 180 instalments by hand would be slow. The future value of an annuity formula does it in one line. Because a SIP is paid at the start of each month, there is an extra (1 + i) at the end.

• M is the maturity value
• P is the monthly instalment
• i is the monthly rate: annual return ÷ 12 ÷ 100
• n is the number of monthly instalments

Worked example: ₹10,000 a month for 15 years at 12%

So M = 10,000 × [(1.01)¹⁸⁰ − 1] ÷ 0.01 × 1.01, which comes to about ₹50.46 lakh. More than 64% of the final value is growth, not money you put in.

How does a SIP grow year by year?

Compounding is slow at first and fast later. The same ₹10,000 a month at 12% looks like this:

Between years 20 and 25 you add only ₹6 lakh, yet the value rises by about ₹90 lakh. That’s the main argument for staying invested and not stopping a SIP after a bad year.

How much does the return rate change the result?

The rate you assume has a big effect over long periods. Here is ₹10,000 a month for 15 years at three rates:

A 4-point difference in the rate changes the outcome by more than ₹15 lakh. When you plan a goal, try a cautious rate as well as a hopeful one, and build the plan around the cautious one.

Also note how the calculator treats the rate. It divides 12% by 12 and compounds monthly, which is the usual method in India. Strictly, 1% a month compounds to about 12.68% a year, so the estimate is a little generous compared with a fund that returns exactly 12% each year.

How is a step-up SIP calculated?

A step-up SIP raises your instalment by a fixed percentage once a year. The calculator runs the same monthly compounding, but uses a bigger instalment each new year.

With a 10% yearly step-up, ₹10,000 a month becomes ₹11,000 in year 2, ₹12,100 in year 3, and so on.

The step-up plan invests about twice as much, mostly in later years, and ends about 1.7 times higher. It suits people whose salary rises each year.

What is the difference between XIRR and absolute return?

A calculator projects the future. Once your SIP is running, you need a way to measure what it actually earned.

Absolute return is total gain ÷ amount invested. In the example above, ₹32.46 lakh gain on ₹18 lakh invested is an absolute return of about 180%. It sounds large, but it ignores time, so you can’t compare it with an FD rate.

XIRR is an annual rate that accounts for the date of every instalment and the date you check the value. It answers “what steady yearly return would give me this result from these exact payments?” That makes it the right number to compare with other investments. Fund apps and your consolidated account statement show it.

If you have a single investment with one start and one end date, CAGR gives the same answer as XIRR. You can work it out on the CAGR calculator. For a one-time investment, use the lumpsum calculator instead of the SIP one.

How are SIP returns taxed?

Tax is worked out per instalment, because each one has its own purchase date. When you redeem equity fund units, units held for more than 12 months give long-term capital gains, taxed at 12.5% on gains above ₹1.25 lakh a year. Units held for 12 months or less give short-term gains, taxed at 20%.

Units are sold first-in, first-out. So when you redeem part of a long-running SIP, your oldest units go first, and these are usually long-term. Check the current rules on the Income Tax Department site before you redeem a large amount.

What mistakes should you avoid?

• Comparing absolute return with an FD rate. An absolute return of 180% over 15 years is not 12% a year in the same sense an FD quotes. Use XIRR.
• Assuming the same return every year. Real returns swing. A steady-rate projection is a planning tool, not a forecast.
• Using a single optimistic rate. Check your goal at 8% or 10% too.
• Ignoring inflation. ₹50 lakh in 15 years will buy far less than today. The inflation calculator shows what a future amount is worth now.
• Forgetting costs and tax. Expense ratios are already taken out of a fund’s returns, but exit loads and capital gains tax come out of what you receive.
• Stopping after a fall. Instalments made when prices are low buy more units, which helps later.

When you are ready to draw an income from the corpus, the SWP calculator shows how long a monthly withdrawal will last.