SIP return can be calculated using absolute return, annualized returns, CAGR, and XIRR. However, CAGR is the most effective method to estimate SIP returns.

CAGR or Compound Annual Growth Rate is the rate at which an investment grows each year for the entire tenure of the investment. Following is the formula of CAGR:

CAGR = (ending value/beginning value) ^ (1/number of years or months) – 1*100

Where,

Ending value is the NAV at the time of withdrawal,
Beginning value is the NAV at the time of investment.
A number of months or years is the tenure of the investment.

Example

Mr Anudeep has invested INR 2,52,000 (INR 3,000 a month) in a mutual fund when the NAV is INR 20. At the time of withdrawal after seven years, the NAV is INR 50. Using the CAGR formula, we can estimate SIP returns for Mr Anudeep.

CAGR =(ending-value/beginning – value) ^ (1/number-of-years) – 1* 100
CAGR = (((50/20) ^ (1/7)) – 1) * 100
Compounded Annual Growth Rate = 13.98%

This means the investment has grown 13.98% each year for a tenure of 7 years. The return will remain the same in terms of months as well.

CAGR = (((50/20) ^ (12/84)) – 1) * 100
CAGR = 13.98% ~ 14%

Hence the investment of INR 2,52,000 will grow to INR 4,29,076 in 7 years.