Types of Mutual Fund Returns
Following are the types of mutual fund return
- Absolute Returns: Also known as point-to-point returns, measure the increase or decrease in an investment value. It is a percentage value and doesn’t consider the time period. This method of calculating returns is typically used for mutual funds with tenure of less than 1 year. If the period is longer, investors must calculate annualized returns.
- Annualized Returns: It measures the growth in the value of an investment on an annual basis.
- Total Return: It is the actual return from the investment and includes both dividends and capital gains.
- Trailing Return: It is the annualized return over a specific trailing period ending on the current date.
- Point-to-point Return: It is the annualized return between two specific points in time.
- Annual Return: It is the return earned between January 1st and December 31st of a specific year.
- Rolling Returns: It measures a scheme’s annualized returns over a specific period of time, such as daily, weekly, or monthly and compares it to the benchmark.
- Compound Annual Growth Rate: It is used to calculate returns for investments with a holding period of more than 1 year. This method assumes a steady growth rate for the investment.
How To Calculate Mutual Fund Return on Investment?
Most mutual funds are aimed at long-term investors and seek relatively smooth and fairly consistent growth with less volatility than the overall market. During bull markets, mutual funds tend to underperform compared to the market average. But they outperform the market average during bear markets. You can calculate mutual fund return using any of the following methods: Annual Return, Absolute Return, Annualized Return, CAGR, and XIRR.
So, what is a ‘high return in mutual fund’? Even better, can we calculate mutual fund ‘best’ return?
The answers to these question would depend on what defines a ‘high’ or ‘best’ return. Like the lump sum/SIP debate, there are no black-and-white answers here, but many shades of grey! Economic conditions and the market’s performance are among the most important considerations in determining a good return on mutual fund investment. Moreover, whether a return is good or not is also largely defined by the investor’s expectations and desired level of return.
There are many ways to calculate mutual funds returns or mutual fund return rate. These methods apply to both lump sum and SIP investments. Which method you use depends on what you are trying to calculate and why.
How to Calculate Mutual Fund Return With Examples?
1. Annual Return
As the name implies, annual return is the return calculated over a period of 1 year and expressed as a time-weighted annual percentage. In simplest terms, annual return is the gain or loss of your initial mutual fund investment over a one year period.
This number allows you to analyse the MF’s performance over any given year you hold the investment. It is used more frequently among investors because it is relatively simple to calculate.
Annual return = (Ending NAV – Beginning NAV) / Beginning NAV
Example for Annual Return:
Suppose the NAV on your MF was 100 on 1st January 2020. On 31st December 2020, your NAV rose to 110.
Then your Annual return for the year 2020 would be = (110-100)/100 = 0.1 or 10%
2. Absolute Return
Absolute return calculation is similar to the calculation for annual return. However, unlike the latter, it can be used to understand the simple returns on your investment at any point in time, not just at the end of the year. The formula is useful for calculating returns when the holding period is less than 12 months. Since it does not take into account the time period of investment and its compounding effect, it is rarely used to measure or evaluate a fund’s performance over a longer time.
Point-to-point return = [(Current NAV – Beginning NAV) / Beginning NAV] x 100
Example for Absolute Return:
Suppose you purchased your MF on 27th May 2019 with NAV of 100. On 26th August of the same year, your NAV rose to 110.
Then your point-to-point return for this 3-month period would be = (110-100)/100 = 0.1 x 100 = 10%
3. Annualised Return
Annualised return is used in a variety of ways to evaluate a mutual fund’s performance over time. Unlike annual return, it is based on the full investment holding period, regardless of whether it is shorter or longer than one year.
Here’s how the annualised return is calculated:
Annualised Return = [(1 + R1) x (1 + R2) x (1 + R3) x …. x (1 + Rn)]1/n – 1
where n = number of investment years
Example for Annualised Return:
Suppose you invested in a MF in 2019 and stayed invested for 5 years. First, calculate the annual return for each of those 5 years. Then add these annual returns and divide the total return by the number of years.
Annual return for:
- 2019: 3%
- 2020: 7%
- 2021: 5%
- 2022: 12%
- 2023: 1%
Annualised Return = [(1 + 0.03) x (1 + 0.07) x (1 + 0.05) x (1 + 0.12) x (1 + 0.01) ]1/5 – 1
Annualised Return = 5.53%
4. Compounded Annual Growth Rate (CAGR)
If the time period is greater than 1 year, CAGR is a better way to depict returns because it incorporates the time value of money. It represents a mean annual growth rate that smoothens out volatility in returns (which are bound to occur) over the investment horizon.
CAGR = (Ending value / Beginning value)1/n– 1
Example for Compound Annual Growth Rate(CAGR):
Suppose you invested 1 lakh in a mutual fund three years back. The beginning NAV for the mutual fund was Rs 20. Now, the NAV is Rs 40.
CAGR = 25.99%
Compared to absolute returns, CAGR presents a better picture of how well a particular mutual fund investment scheme is performing. However, when the investment stretches over a span of time with regular instalments (SIP), it becomes difficult to calculate. Here’s where Extended Internal Rate of Return (XIRR) can be more useful to predict returns on investment.
5. Extended Internal Rate of Return (XIRR) for SIPs
XIRR refers to the aggregation of multiple CAGRs for a SIP investment. In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. Depending on the NAV of the scheme on the day you invest, you get a certain number of units which you keep accumulating from Day 1. On the day you exit the scheme and ‘redeem’ your total units, you get the maturity amount. This amount is the NAV on that day multiplied by the total units.
To calculate the returns on your MF investment using XIRR in Excel, you don’t need the NAV. You only need to know the SIP amount, dates of SIP investments, date of redemption and maturity (redemption) amount.
Example for Extended Internal Rate of Return:
Suppose you invested Rs 2000 per month starting on 1st Jan 2020. You stayed invested for 6 months (this short period is only to simplify this illustration!) At the end of this period, you redeemed an amount of Rs 11,000.
|Date of SIP||Amount|
XIRR = 45.27% per annum (use Excel)
How Does a Mutual Fund Return Calculator Work?
If you would like to automatically calculate your mutual fund returns, you can do so using a mutual fund SIP return calculator or mutual fund lump sum return calculator (depending on your particular mutual fund). This simple online tool will calculate your fund’s returns according to your investment horizon to give you the investment value at maturity. You can easily adjust the calculator’s variables such as nature of investment (SIP or lump sum), investment amount, frequency (in case of SIP), expected rate of returns, etc.
What is the Average Rate of Return on a Mutual Fund?
Different type of mutual funds has different returns. There are different categories of mutual funds like equity mutual funds, debt mutual funds and hybrid funds. Equity mutual funds invest in equities and equity-related instruments. Over the historical period, the equity funds have given an average return of 10%-12% or sometimes even more. However, equity funds have risk associated with them. The returns from these funds are based on market fluctuations.
Debt mutual funds invest in government bonds, corporate bonds, debentures and other money market instruments. They are also known as fixed-income funds. Historically, the debt mutual funds have been able to deliver an average return of 8%-9%. Also, the debt mutual funds can give better returns than other fixed investments like Fixed deposits. If investors are looking for a moderate risk tolerance level, they can invest in hybrid funds, including a mix of debt and equity-related instruments.
To estimate mutual funds return, one can use Scripbox’s mutual fund calculator, which is available online.
Learn more about mutual funds, how they work, their benefits, how to invest in them and some of India’s top return mutual funds, check out our other articles below!
- Types of Mutual Funds You Need to Know
- How do Mutual Funds Work in India with An Example
- Taxation of Mutual Funds: How mutual funds are taxed in India
Explore Loan Against Mutual Funds
Frequently Asked Questions
Mutual fund returns are market-linked and hence are volatile. Therefore, the returns from mutual funds are highly dependent on the stock market performance. In a scenario where the market is in a downward trend, the returns from the funds may be negative. However, the market always moves in a cyclic nature and hence, after an uptrend follows every downtrend.
Also, the returns from equities are highly volatile in the short term. Hence, one should stay invested for at least five to seven years to earn significant returns. Furthermore, one should not panic, looking at the short term returns or negative returns. In the long term, one will be able to generate significant returns.
There are 8000+ mutual fund schemes available in India. These schemes have the potential to fulfil various kinds of financial goals for various risk profiles.
Mutual fund schemes are designed to match different financial goals for all life events. For example, retirement, marriage, children’s education, buy a home, car, or bike, and taking a foreign vacation can be sponsored through mutual fund investments.