Mutual fund returns are an important metric to evaluate the performance of a mutual fund. They help investors assess the profitability of their investments over specific periods. Returns can be absolute or relative, providing insights into different aspects of fund performance. There are various types of returns associated with mutual funds.
Here is a brief explanation of each type of return in mutual funds:
Absolute Returns:
Absolute returns measure the percentage growth of an investment over a specific period of time. It is calculated using the following -
Absolute Return = ((Current value of investment – Initial investment) / Initial investment) * 100
For example, if you invested Rs. 10,000 in a mutual fund in April 2020 and the value of your investment in October 2020 is Rs. 15,000, your absolute return is 50%.
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Annualized Returns:
Annualized returns are the average amount of money an investment earns annually over a given period. The formula considers both the returns over a certain time and how long the investment was held, giving compounded growth.
Annualized Return = ((1 + r1) × (1 + r2) × (1 + r3) × … × (1 + rn)) ^ (1/n) - 1.
For example, if you invested Rs. 10,000 in 2012 and stay invested for 3 years. First, calculate each year's annual returns, then add the returns and divide the total return by the number of years.
2012: 7%, 2013: 1%, 2014: 3%, 2015: 5%, 2016:12%
Annualised return = [(1+0.07) x (1+0.01) x (1+0.03) x (1+0.05) x (1+0.12)]^1/5 -1
Your annualized return is 5.53%.
Total Returns:
Total returns are the sum of accrued returns, including interest earned, dividends and capital gains over a particular period. It is calculated using the following formula:
Total Return = (Capital gains+ Dividends or Interest) / Total investment * 100.
For example, you invested Rs 20,000 by buying 400 units of Rs 50 each. After a year, the Net Asset Value (NAV) stands at Rs 60 per unit, and you also receive a dividend of Rs 15 per unit. The total returns, in this case, will be calculated as follows:
Total Returns = [((60 − 50) × 400 + (15 × 400))/20000) × 100] = 50%
Your total return from the investment will be 50%
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Point-to-Point Returns:
Point-to-point returns are the annualized returns generated by an investment between two specific dates. This is usually used when calculating returns between two specific dates.
For example, the NAV on 1st January 2019 was Rs.60 and on 31st December was Rs.65. So the point-to-point return will be –
P2P return= [(65-60)/60] x 100 = 10%
Trailing Returns:
Trailing returns measure returns generated over a specific period ending on a current date. It is calculated using the following formula –
Trailing Returns = [(Current NAV/NAV at the beginning of the trailing period) ^ (1/Trailing period)] -1
For example, if today’s NAV of the fund is Rs.60, which was Rs.40 two years ago, the trailing returns for the last 2 years will be
Trailing returns = [(60/40) ^ (1/2)] – 1 = 28.8%
Rolling Returns:
Rolling returns measure the annualized returns over a specific period, such as daily, monthly, or weekly. This helps to measure the fund’s absolute and relative period at regular intervals. Also, it helps to evaluate the performance of a scheme as it reflects how it has improved consistently and not just over the latest period.
CAGR:
Compounded Annual Growth Rate (CAGR) is used to measure returns from investments whose holding period exceeds a year as it incorporates the time value of money. This smoothens out short-term fluctuations and volatility in returns over the investment period. The following is the formula to calculate CAGR –
CAGR = [(Current Net Asset Value / Beginning Net Asset Value) ^ (1/number of years)]-1
For example, you have invested Rs.50,000 in a mutual fund scheme. Initially, the NAV was Rs.25, and the current NAV is Rs.50.
The CAGR for your investment is 26.76%
CAGR is not helpful when the investment stretches over a long term with regular instalments like SIP. It becomes difficult to calculate. Hence, an Extended Internal Rate of Rate (XIRR) is more useful to calculate returns.
Use our SIP calculator to estimate your SIP and lumpsum returns
Conclusion
Understanding the various types of mutual fund returns can benefit investors to make informed decisions for their investments. Each return metric offers a unique perspective on performance, aiding investors in assessing risk and potential rewards associated with their investment choices.
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