Don’t make this mistake while computing mutual fund SIP returns!

Published: May 22, 2022 at 6:00 am

We discuss how to avoid a common mistake made by investors while computing mutual fund SIP returns.

On 20th May 2021, the Sensex (price) index was 49,564.81. About 5 months later on 18th Oct 2021, it rose to 61,765.59. Many mutual fund AMC investment dashboards or investment portals would report the annualized return during this period as 70% (excluding dividends). But is this right?

An annualised return is a measure of growth over a year. If we take this 70% figure seriously, then Sensex should be more than 84,370 today (20th May 2022) relative to what it was a year ago. It is only about 53,860.

There are two types of annualised returns. The CAGR (for a single investment) and the XIRR (for multiple investments). See CAGR vs XIRR: Understanding Annualized Return.

Using either of them when our investment is less than a year old is like assuming Virat Kohli would hit a century because he drove his first ball for a four. Many investors make this common mistake.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

SEBI has mandated that only the absolute return or percentage change in NAV/price should be used for computing returns less than a year old.

Take away: Use only the absolute return for investments less than a year old.

Can I use the XIRR for a SIP started one year ago? No. Not yet! Such a monthly SIP would have 12 instalments and only one of them would be one year old. So it does not make sense to annualise the return obtained.

To appreciate this, let us compute the weighted average duration. Consider a SIP started in May 2021. By April 2022 12 instalments would be over. Tabulated below are the dates and time elapsed in years with respect to the last NAV date at the time of writing (19th May 2022)

SIP datesTime elapsed in years

Only the first instalment is one year old. Let us compute the weighted average of the time elapsed.

If Rs. 5000 is the amount invested each month, then

First, we compute the sum-product
(1.04×5000)+(0.96×5000)+(0.87×5000)+ …. = 34931.51

Then divide this by the total investment (5000 x12)

34931.51/60000 = 0.58 years.

Does it make any sense to take the XIRR of a 1Y SIP whose average duration is only 0.58 years seriously?

Of course not. But then again, the XIRR in itself is only an approximation and should be used as a crude measure of growth. Remember there is no compounding involved with mutual funds!

A high XIRR tells you “all is well” at least temporarily and a low or negative value of XIRR often means “hang in there”.

After five years if your portfolio XIRR is 17%, do not assume your portfolio has grown 17% each year! Return measurements are always ‘point to point” and ignore the risks in the journey. For instance, see. How annualized returns are computed!

How annualized returns are computed!The average investment duration is important with respect to portfolio decisions. For example, you can safely ignore an XIRR of +120% or -34% when the avg duration is less than a year. But you should review the underlying fund or stock when the XIRR is -6% with an avg duration of 5.4 years.

Please also keep in mind that portfolio returns can swing wildly. What matters is accumulating enough cash for future expenses. See: My retirement equity MF portfolio return is 2.75% after 12 years! So do not take the XIRR too seriously. A high XIRR does not mean a high corpus!

Takeaway:  XIRR of a SIP investment or a mutual fund or stock portfolio become more and more representative of past growth as the avg duration becomes higher and higher.

We recommend taking XIRR of your individual SIPs and overall portfolio seriously only after two years of investing.

The freefincal mutual and stock portfolio trackers on Google sheets have now been updated with the average investment duration for each instrument and the overall portfolio to appreciate the portfolio and fund/stock XIRRs in the right context.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)