How Platform-Based SIP Tools Vary in Their Return Logic

Systematic Investment Plans have become an integral component of long-term investing for millions of Indians. They provide a disciplined approach toward wealth creation by smoothing out market volatility with periodic investments. With the growth in the number of investors,  the consumption of digital investment platforms and SIP calculators is also growing due to increased demand. 

These tools help investors anticipate how their monthly contributions might grow over time. However, with the advent of many such tools, confusion has arisen among investors related to their investment returns, as different platforms show different maturity values for the same SIP amount, duration, and expected rate of return. In this blog, we will explore the reasons behind the difference in return logic of different SIP tools.

Why SIP Calculators Don’t Show the Same Results

SIP investing is a simple process that involves investing a fixed amount at regular intervals.  However, the mechanics of projecting future return values depend on multiple assumptions. Different platforms interpret these assumptions differently, which leads to varying results. Let's break down how and why these variations occur.

Assumptions of Return Rate Vary Across Different Platforms

At the core of every SIP calculator is an assumed annual rate of return. But not all calculators follow the universal standard. Some use:

• A fixed rate of return, for example, 10% or 12%

• Market-based estimates

• Mutual fund category-wise historical averages

• Custom user-defined inputs

For example, the groww SIP Calculator allows investors to check their future returns with varying return rate assumptions for flexibility. In contrast, many other calculators are only based on a single fixed projection. And when the underlying assumption differs even by 1-2% it creates a big difference in the projected wealth.

Compounding Frequency Affects Final Projections

The compounding frequency applied in the SIP calculators directly affects the maturity amount. Different calculators may apply :

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• Annual compounding 

• Monthly compounding

• Daily NAV-based compounding

Technically, SIPs grow through NAV-based daily compounding, but most platforms simplify this to either monthly or yearly projections. This tends to make projected returns appear higher or lower, depending on the projection method.

Because of this, two calculators using the same return rate could show different results simply because one uses monthly compounding and another uses yearly compounding to calculate returns.

Projections - Inflation-Adjusted vs. Non-Adjusted

Some SIP calculators are inflation-adjusted and give projections of the maturity amount in terms of real purchasing power, while others reflect nominal returns without considering inflation. For example, a projected maturity value of ₹50 lakh looks impressive. But if one considers inflation at 6%, the real value may come down considerably.

Therefore, the calculators, which provide inflation-adjusted returns, present more conservative results, while those that do not include inflation yield optimistic results. It all depends on whether an investor wants to understand the future amount or future purchasing power.

Use of Historical NAV Data vs. Static Return Models

Some SIP calculators rely on historical market data to project future returns, while others depend solely on static annual return assumptions. SIP calculator tools with historical NAV data reflect market reality but are prone to volatility based on the time period selected.

While SIP calculator tools with static models are much more stable in their projections, they oversimplify the market cycles. The difference often explains why two tools are quite different because one is backwards-looking and the other is forward-looking.

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Different Calculation Methods: XIRR vs CAGR

Since contributions occur at regular periodicity, SIP returns are best measured using XIRR. However, many calculators still project returns through CAGR-based calculations, assuming the whole investment grows uniformly, which is not true in the case of periodic investments.

The XIRR-based tool is more accurate at predicting returns for long-term SIPs. CAGR-based calculators inflate or deflate the projections of actual return expectations.

Step-Up SIP and Customisation Options

Most modern platforms allow the facility of step-up SIPs, where investors periodically increase their SIP amount. However:

• Some platforms assume fixed step-up percentages

• Some allow full customisation.

• Some do not offer Step-up SIP options.

SIP calculators that consider the increments in SIP contributions give significantly higher maturity amounts compared to SIP calculators that consider only static contributions. This may be another reason for different results from various platforms, even if the basic SIP amount is the same.

Platform-Specific Algorithms and Risk Assumptions

Some calculators also consider an investor's risk profile and automatically adjust return expectations, while others expect the user to make aggressive, moderate, or conservative assumptions themselves.

For example, a tool from a large financial institution, say the SBI SIP calculator, may provide more conservative projections based on long-term historical performance. 

In contrast, a fintech calculator might offer a wide range of projections for user flexibility. These subtle logics and differences in assumptions yield visible differences in outcomes.

Conclusion

Platform-based SIP tools fundamentally vary because they are based on various return logics, compounding models, inflation adjustments, and historical data. While each calculator is a good guide in its own way, investors should avoid being entirely dependent on any one tool.

While each calculator is a good guide in its own right, investors should avoid being entirely dependent on any one tool. Rather, a comparison of projections across platforms and an understanding of the underlying assumptions helps in better financial planning.