Want to know your SIP returns? Calculate it using
Want to know your SIP returns? Calculate it in 3 Simple steps using XIRR
Do you invest in mutual funds through a Systematic Investment Plan (SIP)? Or, do you invest in mutual funds from time to time? For most of us, investments and redemptions take place over a period. In that case, what is the best way to calculate the returns on your mutual fund investments?
There are different ways to calculate mutual fund returns. Compounded Annual Growth Rate (CAGR) is mostly used to calculate the returns. It is a simple formula where you take the invested amount and the current investment value into account. The formula helps to calculate point-to-point returns. However, to calculate regular or irregular investments or redemption at different points in time, you need to adopt a different method.
Extended Internal Rate of Return (XIRR) may be a better way to calculate returns on your periodic investments.
What is XIRR?
While investing in mutual funds through SIP, you are investing regularly at a pre-determined interval. As each investment stays invested for different periods, the returns generated on these investments would differ. This is because each investment would remain invested for a different time frame. Also, the returns generated during the period would vary. Hence, to make it easier for the purpose of calculation, we can assign an average CAGR.
We can call this adjusted CAGR as XIRR.
MS Excel automatically calculates the XIRR for you through the XIRR function.
How is XIRR calculated?
To calculate XIRR, you need the SIP amount, date of investment, date of redemption, amount of partial redemption (if any) and the total redemption amount.
The formula for XIRR is
XIRR= XIRR (values, dates, guess)
Values are the SIP or transaction amounts, dates are the transaction dates, and guess is the approximate return you expect from the investment. You may skip the guess part.
When calculating in excel, we consider the SIPs and other investment amounts as outflow. Hence, we put a minus sign before the invested amount. Please note that there is no negative symbol for inflow or redemption amount.
Also, make sure that you input the investment or redemption date in the dd-mm-year format as the formula may not work in other formats.
Let us take an example:
Let us assume that person A invested Rs.10,000 per month in a scheme for a year. At the beginning of the 13th month, the person redeemed the total investment worth Rs. 1.30 lakhs.
Here are the steps that you need to follow:
Step 1: Make a table with two columns. Input the date of investment/redemptions in one column and the SIP amount in the second column.
Step 2:Use the XIRR function in Excel. Now, select the values and dates. Select the range of transaction values and investment dates from the specific columns.
|
Investment Date |
SIP Amount |
|
10-01-2020 |
-10,000 |
|
10-02-2020 |
-10,000 |
|
10-03-2020 |
-10,000 |
|
10-04-2020 |
-10,000 |
|
10-05-2020 |
-10,000 |
|
10-06-2020 |
-10,000 |
|
10-07-2020 |
-10,000 |
|
10-08-2020 |
-10,000 |
|
10-09-2020 |
-10,000 |
|
10-10-2020 |
-10,000 |
|
10-11-2020 |
-10,000 |
|
10-12-2020 |
-10,000 |
|
10-01-2021 |
1,30,000 |
|
XIRR |
15.66% |
Step 3:Convert the value into a percentage for XIRR in percentage terms.
Here, the XIRR is 15.66%.
You can use the XIRR formula to calculate monthly SIP, yearly SIP, and returns from uneven investment amounts. Moreover, the date of investment/ redemption can also vary.
Conclusion:
If you are a mutual fund investor, you need to know that SIP returns are not the same as the regular CAGR. XIRR is a useful MS Excel function through which you can calculate the rate of returns of your SIP installments.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
Types of mutual funds
Here’s How To Select The Right Type Of Mutual Fund
We all love to have choices in different aspects of our life. Whether it is books, clothes or a career, options are essential. Everyone has different inclinations and tastes, and hence, selecting the right choice is of utmost vital.
Similar is the case with mutual funds. Mutual funds also come in various shapes and sizes to suit every investor and make their dreams come true. No matter what kind of investor you are or what your goals are, there will be a mutual fund for you. But finding the right type of mutual fund may not be easy for a lot of new investors.
Mutual funds can be classified into various categories based on their assets, options etc. In this article, let us try to understand these types of mutual funds that will help you to find out what will suit you the best.
Based on asset class:
Equity and debt are two major types of assets where mutual funds invest. They have different objectives. While equities are mostly for capital appreciation in the long term, the aim of the debt is capital protection along with moderate returns.
There are three different types of mutual funds based on the asset classes: equity funds, debt funds and hybrid funds.
The type of fund that will suit you the best will depend on your investment horizon. For example, if you want to buy a house in 15 years, then 15 years is your investment horizon. In another instance, if you are planning for an exotic vacation in less than a year, then one year is your
limit.
For long term goals of five years and more, an equity fund is the best option. Equity funds tend to be volatile in the short run, and the risks are evened out in the long run. Debt funds are good investment options for short term goals of around three years or less. For your financial goals of 3 to 5 years horizon, hybrid funds can be the ideal category.
Open-ended and close-ended funds
A fund remains open for initial subscription for a limited number of days during its launch. It is the new fund offer (NFO) period. In close-ended funds, investors can only invest during the NFO period. Close-ended funds come with a specific period of say three years. Also, investors do not have the option to invest more or exit during the period. After the period is over, investors have to redeem the mutual fund units. Also, a systematic investment plan(SIP) is not available for close-ended funds.
Open-ended funds do not have these limitations. These funds remain open for entry and exit, making it an ideal choice for goal planning. It helps you to adjust your goals according to your life stage. It allows prioritising your goals. For example, buying a home is your priority; you can invest more and increase your SIP regularly. Once, you reach your target amount, you can easily redeem your units. You do not have to wait for the maturity date. Hence, an open-ended fund is a better option than a close-ended fund.
Growth and dividend options
Fund houses also offer two options: growth and dividend option. In the growth option, the fund reinvests the profits back in the fund. As a result, the net asset value (NAV) of the fund keeps on rising as the scheme gains. This helps you to take advantage of the power of compounding. In the case of the dividend option, investors get the profits declared by the fund. Hence, the NAV comes down as and when the dividends are declared.
The growth option is better to build wealth over time and fulfill your financial goals. And if you're looking for a regular income source, then you can choose a systematic withdrawal plan (SWP) instead of a dividend option. In the case of SWP, you receive a fixed sum of money regularly, and the remaining corpus in the fund will continue to grow.
Hence, go for the growth option to fulfill your financial goals.
Conclusion: We have seen that the category and type of fund that you need to select depending on your financial goals. Moreover, the growth option in open-ended funds is a better option for investors. It gives the benefits of compounding, along with liquidity.
To know more, consult your financial advisor.
Loan against mutual fund units
How Mutual Fund Investment Can Help You During Emergencies
Preparing for emergencies is the first step in any financial plan. Having a certain amount of money parked in a savings account or liquid fund can help to tide over difficult scenarios. However, sometimes, the emergency fund may not be enough. And, you might have to borrow money. And loan against collaterals can be helpful to tide over such a situation.
You must know you can take a loan against gold or property. But did you know you can take a loan against your mutual fund investment? In this blog, we will look at loans against mutual funds.
What is a loan against a mutual fund?
A loan against a mutual fund is just like the other loans backed by collateral. In this case, the collateral is your mutual fund investment. A financial institution such as a bank marks a lien against your mutual fund units and disburses the loan amount. Once they mark the lien, the bank will have ownership of your fund units. One should remember that the bank keeps a lien against your mutual fund units and not your investment amount or the current value of your investment. So, once the lien is marked, you don’t have access to your units. This means that you can’t redeem those units until you repay the loan.
And just like other loans, banks will decide the amount of loan based on your number of units, type of mutual fund and loan tenure.
The lien gets removed as you repay the loan.
How can I apply for a loan against mutual funds?
Nowadays, most banks offer instant loans against mutual funds, similar to their overdraft facility.
You will have a loan agreement with the bank. The lender instructs a mutual fund registrar, such as CAMS or Karvy to place a lien on the quantity of pledged units. The registrar then stamps the lien and sends a letter to the lender, with a copy to the borrower, confirming the claim.
Things to keep in before borrowing against your mutual fund units
You can borrow against different types of mutual funds such as equity funds, debt funds and hybrid funds. However, the loan that you can get depends on the type of mutual fund. Different banks will have different criteria. For example, we can borrow up to 50% of your mutual fund value with equity funds and 80% with debt mutual funds.
There will be a minimum and maximum amount that you can borrow against your fund units. This amount will differ among banks.
Banks may not offer loans against every mutual fund. Each bank has an approved list of mutual funds. E.g., ICICI Bank offers loans against mutual funds registered with CAMS.
Advantages of borrowing against mutual fund
Instead of selling your mutual fund units, taking a loan against a mutual fund can be a better option. Here are some advantages of taking a loan against mutual funds.
Tide over an emergency: This is especially useful during a crisis because you can pledge your mutual fund units and instantly get the money into your bank account.
Fulfil short-term financial needs: Loans against mutual fund can be a unique way to raise funds for short-term financial needs. You can borrow money against your MF units for a short period and repay it over time without jeopardising your mutual fund unit ownership.
Low interest rate: Interest rates on loans secured by mutual funds may be cheaper than those on unsecured loans, such as personal loans.
Your units stay invested: You won’t have to sell your mutual fund units if you take out a loan against them. The mutual fund units that have been pledged will remain invested and generate returns. This ensures that your financial plan and investment ownership remain intact.
Only pay interest on the utilised amount: When you take loans against mutual funds, you only pay interest on the amount credited to your account and not the total loan amount guaranteed from your mutual funds.
Conclusion:
Even if you have money in your bank account, you may need to take out loans for several reasons. It’s because of certain unexpected expenses that may require a loan. You can borrow money against mutual funds if you invest in them. This will help you meet your financial obligations while also ensuring that your investments continue to generate returns.
This blog is purely for educational purpose and not to be treated as a personal advice. Mutual fund subject to market risks, Read all scheme related documents carefully.
3 Asset Allocation Strategies
3 Asset Allocation Strategies That You Need to Know
Most of us want to reduce the risk and get a better outcome in our investment portfolio or other areas of life. And, one of the ways to improve investment returns is through asset allocation. Asset allocation is an investment strategy that involves investing in a variety of asset classes to optimise risk and return.
Historical data have shown that the various asset classes, such as equity, fixed income or debt, and gold, indicate a low or negative association. As a result, diversification across asset classes can significantly lower risk while potentially generating higher long-term returns.
There are three main ways to carry out asset allocation: strategic asset allocation, tactical asset allocation and dynamic asset allocation.
Strategic Asset Allocation
If a mutual fund has a static asset allocation mix, then we can say that it follows a strategic asset allocation. The static asset allocation mix is usually in a range, and the fund managers can invest in the investment instruments within that range.
For example, if the asset allocation of a fund mentions that 65-80% of its assets need to be in equity instruments, then the fund manager has to invest 65-80% of the portfolio in equities at all times. In this case, the state of the market and economy doesn’t influence the fund’s asset allocation.
The fund’s asset allocation may change as the price of various investment options such as stocks fluctuates regularly. So, the fund manager may need to rebalance the fund’s portfolio from time to time to maintain the asset allocation breakup of the fund.
Let us consider the previous example where the fund maintains an equity allocation within 65-80% of the portfolio. The fund’s equity allocation may cross the maximum limit if the equity market rises more than the other assets. In this scenario, the equity allocation of the fund may become 90%. So, the fund manager has to sell stocks and/or buy other asset class instruments such as debt securities to bring the asset allocation back to the intended asset allocation.
Tactical Asset Allocation
You may feel that strategic asset allocation is too rigid. However, market conditions may generate additional returns from time to time that a static asset allocation strategy may be unable to take advantage of. Tactical Asset Allocation is a variation of Strategic Asset Allocation in which the fund managers may deviate a little from the strict asset allocation to take advantage of the market opportunities and earn extra returns for the investors.
To carry out tactical asset allocation, one needs to know market timing and in-depth market and investment knowledge. For instance, if the strategic asset allocation calls for 70% in equity and 30% in debt and the fund manager believes that equities in the short run can provide attractive returns, then they might hike up the equity allocation to 75% to take advantage of the possible upswing in the equity markets. And after the window of opportunity closes, they can revert it to the original asset allocation.
Dynamic Asset Allocation
The counter-cyclical asset allocation method is the most prevalent dynamic asset allocation method implemented by mutual funds. In this asset allocation method, you regularly modify your asset allocation mix based on market conditions. When stock valuations fall, i.e., the stock prices become cheaper, these funds increase their equity allocation and reduce debt allocations. This is also known as a counter-strategy because it is based on the investment principle of buying low and selling high. For dynamic asset allocation, different fund managers utilize different valuation criteria. The most commonly used valuation metrics are the P/E and P/B ratios. In a dynamic asset allocation strategy, some fund managers employ multi-factor asset allocation models, which integrate two or more components, such as P/E, P/B, Dividend Yield, and so on.
Conclusion: There are different asset allocation strategies that investors and fund managers use. Strategic asset allocation, tactical asset allocation and dynamic asset allocation are the three common asset allocation strategies.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.
How to re-balance your Mutual Fund Portfolio
A mutual fund is a popular investment option through which one can invest in a portfolio of securities such as stocks and debt investments. There are multiple types of mutual funds to cater to your different financial goals and needs. You build a mutual fund portfolio when you invest in different mutual funds such as equity funds, and debt funds to achieve your long term and short-term financial goals.
The asset allocation of your mutual fund portfolio is the mix of different assets such as equities and debt. The ideal asset allocation in your mutual fund portfolio will depend on your various parameters such as financial goals, investment horizon and risk tolerance. For instance, your ideal asset allocation of mutual fund portfolio between equity and debt may be 60:40. This means that out of our total investments in mutual funds, 60% of your investment should be invested in equity investments and the rest in debt instruments.
Rebalancing refers to selling equity investments or buying debt investments, or vice versa, ensuring that the portfolio's asset allocation matches the ideal asset allocation.
Often, rebalancing is considered a part of a long-term investment strategy. In other words, it is an exercise that needs to be undertaken regularly to fulfill long-term financial goals.
How to Rebalance Your Mutual Fund Portfolio?
Here is how you can start with portfolio rebalancing for your mutual funds:
- Set Goals for Asset Allocations:
The initial step in the portfolio rebalancing is to set goals for asset allocation. If your stock or bond ratio seems better to you in the current market scenario and you think it will still have better performance in an upturn or downturn, go for the same. However, if you do not have any asset allocation strategy, you must focus on having one. You can seek help from an experienced financial planner to help you figure out your ideal asset allocation.
- Find out About your Current Asset Allocation:
Once you have finalised a strategy for asset allocation, you must find your current asset allocation. Gather all the investment statements you have, and you can calculate to understand the current asset allocation. There are multiple free and paid online tools other than mobile applications that can show the asset allocation breakup of your investments.
- Create a Portfolio Rebalancing Plan:
If your asset allocation goals and the current portfolio are in line, the task is almost done. However, you might have to make some changes. When you decide upon the funds to be added to your portfolio and the units to be sold or bought, you will find that the process is more about trial and error. You might require revaluating the impact of buying or selling some holdings before making the actual trade. Even though your portfolio doesn't need to be a replica of the market, you must find out if it is heavily skewed towards some sector or style.
- Paying Heed to Tax Angle:
Before you rebalance your mutual funds' portfolio, you must consider the tax impact of your investments. Therefore, if you invest in the equity funds, ensure not selling off the units before a year to avoid paying the short-term capital gains taxes. For non-equity mutual funds, any holdings sold within three years from the purchase are subject to the short-term capital gains tax. The capital gains are added to the income and taxed as per the income slab. In contrast, the holdings sold after three years are subject to long-term capital gains tax of 20% after indexation benefits.
How often should you rebalance the portfolio?
There is no right or wrong answer to this question. A significant life event such as marriage, the birth of a child or death may call for portfolio rebalancing in addition to a regular portfolio check-up.
Ideally, you should review your portfolio every year. You can decide on a fixed date that is easily memorable. You can look at rebalancing your portfolio if there has been an extreme change in the asset allocation mix. Moreover, consider the expenses before rebalancing your portfolio.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, Read all scheme-related documents carefully.
4 reasons why you need a financial advisor?
Before we understand the importance of financial advisors, answer this one simple question.
Did you take the help of a CA or a tax consultant to file your ITR returns this year? While it can be done for free in the income tax department, we still consult our tax consultant so that we don't go wrong anywhere.
However, when it comes to managing money, most people do not want to take any help from financial planners or advisors. There are many reasons for this attitude. Some think it is a waste of money, while others believe that they can handle their money.
Financial advisors can provide immense value to any individual’s portfolio.
Here’s why you need a financial advisor:
Assess your financial health:
An advisor examines an individual’s financial situation and health. He may pinpoint weak points that need strengthening. For example, the advisor may alert you about wasteful expenditures. He may identify investments that are not giving optimal returns and accordingly suggest you the right way forward.
Teach you the basics of investing:
There are many resources on Google through which you can learn the basics of investing and personal finance. However, there is a high probability that you get lost in this maze. Some articles will suggest plan A, while others will tell you to follow plan B. This can increase the confusion. And as a result, you may postpone starting your investment at a later date.
When you have a financial advisor, he or she will make sure that you understand the basics of investing. The world of finance is vast. Hence, it is always better to know and understand the parts that are important to you.
Choosing the right products to invest and aligning your investments with your goals
Even if you know the basics of investing, choosing the right products to invest may be uphill for many. It is because there are different types of products in a particular category. Also, the companies keep on coming up with products, some of which are too complicated to understand.
A financial advisor will suggest the right financial products for you and ignore the noise. Financial advisors regularly meet the investment teams of the financial products to understand their investment rationale. For example, in case of mutual funds, financial advisors use a lot of ratios and parameters that help them to collate the list of top funds under the different categories. In addition, they regularly compare the various financial products with its peers to suggest you the right product.
Selecting the investment product will not mean much if it is not aligned with your financial goals. Not just your financial goals, the investment product should also go with your risk-taking capacity and time horizon. E.g., the best small-cap fund may not be the right choice if your investment horizon is just three years.
Help you to stay focused on your goals
While we may like to believe that personal finance and investing is all about numbers and selecting the product that has given the highest returns in the recent past, it is mostly about habits. It has more to do with behaviour and discipline than returns. In this journey, many investors tend to make avoidable mistakes.
Investors are likely to be carried away by discussions with their colleagues and friends. They become tempted to follow the footsteps of their friends, even without knowing if that will be the right approach for them or not.
In this scenario, the financial advisor will handhold you and suggest you the right steps and make you stay on the course to reach your financial goals. Also, financial advisors carry out portfolio review at regular intervals to make sure that you are on the right track to achieve your financial goals.
These were the four main reasons why having a financial advisor is the best that you can do for your financial health.
