Scripbox uses the industry standard"Time Weighted Return" computation (XIRR), which takes into account the time duration of your investments. This method more accurately reflects your return when you make multiple investments over a period of time, as in a SIP.
Let me explain:
Let's say you invest Rs 20,000 per month for 8 months starting August 2013. The value on April 1, 2014 is Rs 175,000.
Return (Rs) = Current Value - Amount invested
= 1,75,000 - 1,60,000 = Rs 15,000
Return (%) = Return/ Amount invested x 100
= 15,000/ 1,60,000 x 100 = 9.30% for 8 months OR 9.30 x 12 / 8 = 14.06% per annum
You will, however, note that you did not invest Rs 160,000 altogether 8 months ago. You invested some amount it every month.
Each of your SIP amounts has been invested for different periods and earned a return for different periods of time.
August 13 investment (20,000) for 9 months
September 13 Investment (20,000) for 8 months .... February 14 investment (20,000) for 2 months March 14 investment (20,000) for 1 month
So in a way, it is incorrect to consider the amount invested as Rs 1,60,000. Think of your savings bank account - you earn interest on the balance on different days and NOT the balance at the end of the month.
What Your Money Grows To
XIRR shows your personal rate of return
There is a complex way to compute the rate of return called XIRR which considers the actual date on which your money was invested. It's also called the "Personal Rate of Return" because it's unique for each investor reflecting their investment pattern.
For someone investing just once at the beginning of the period, there is no difference in the return calculated by the two different methods. However, for customers with SIPs, the simple return calculation tends to understate the return. For example, the XIRR return in the above example is 26.8% per annum.
We use XIRR to provide a better understanding of your investments' performance when you invest regularly.