SIP Tips: Looking for returns on SIP? Are you making this big mistake?
Looking at SIP returns? You might be making a major mistake; an expert explains the crucial difference between XIRR and portfolio returns. Most investors who invest in mutual funds via SIPs (Systematic Investment Plans) often make a fundamental error when assessing their profits. Hemant Rustagi, an expert from Wiseinvest, explained on Zee Business's show 'Money Guru' that investors often mistake the 'absolute return' of their portfolio for their actual profit—a metric that is not entirely accurate for SIPs.
According to Rustagi, to truly understand the performance of an SIP investment, one must look at 'XIRR' (Extended Internal Rate of Return), because each installment remains invested for a different duration.
The math of installments: Why is absolute return misleading?
Responding to questions from anchor Smita Rishal during the show, Rustagi explained that an SIP is not a one-time (lump sum) investment but rather a long series of investments.
Illustrating this with an example, he noted that if a person invests via SIP monthly for a year, they deposit a total of 12 installments. The key point here is that the first installment gets a full 12 months to grow in the market, the second gets 11 months, and so on, with the final installment perhaps not even completing a full month.
This is why calculating returns by simply aggregating all investments and looking at 'point-to-point' values—comparing the starting value to the ending value—can be incorrect. Absolute return fails to account for how long each specific investment was at work.
XIRR: The right way to measure actual profit
According to the expert, accurately measuring SIP returns requires considering the investment date and tenure of each installment. XIRR does exactly this; it calculates the total return based on the timing of each individual installment. During the calculation, installments that have remained invested in the market for a longer period are assigned higher weightage.
Let’s consider an example.
Hemant Rustagi shared a real-world scenario based on market movements. Suppose someone started an SIP at an NAV of ₹100. The market rallied, pushing the NAV to ₹138–139, but a late-stage decline brought it down to ₹130. In this situation, the portfolio's absolute return might appear to be only around 8.25%, which could disappoint the investor. However, if the XIRR for this investment is calculated, it could be close to 15%. This discrepancy exists because the initial installments had ample time to grow.
Metric | Primary Focus | Accuracy
--- | --- | ---
XIRR | Considers the date, investment duration, and timing of each installment | 100% accurate and realistic for SIPs
Absolute Return | Shows only the difference between the initial investment and current value | Misleading for SIPs; ignores the time factor
Portfolio Return | Provides a rough estimate of the entire portfolio's performance | Fine for general information, but technically incomplete
Expert advice for investors
It is clear that investors should not make decisions based solely on absolute returns when checking their portfolio value. Hemant Rustagi clarified that since SIP funds are invested at different times each month, CAGR or absolute returns do not reflect the true picture of the investment.
Key takeaway for you
Investors should always check the XIRR in their statements, as it is the metric that reveals how each individual installment has performed. If you are investing for the long term, this is the most authentic way to gauge your actual returns amidst market volatility. In short, the time gap between the first and last installment holds the key to understanding your true profit.
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
