Calculating Mutual Fund Returns: Types of MF Returns, Calculation & Factors (2024)

Reading Time: 1 minutes

Join us on a journey through the intricacies of calculating mutual fund returns. We’ll explore various methodologies, formulas, and metrics like annualized returns, total returns, and compound annual growth rate (CAGR). Whether you’re a novice investor seeking basic understanding or an experienced one craving advanced insights, this guide equips you with comprehensive knowledge. Our goal is to empower you with the tools to effectively evaluate your investment performance.

What are Mutual Fund Returns?

Mutual fund returns represent the profit or loss generated from investing in a mutual fund over a specified period. It measures the fund’s performance and profitability, usually shown as a percentage indicating the change in investment value considering factors like capital growth, dividends, and distributions.

These returns are computed for various periods like daily, monthly, quarterly, or annually. They offer investors crucial insights to evaluate their investment’s performance and to compare different mutual funds.

Types of Mutual Fund Returns

Did you know mutual funds offer various types of returns, aside from their diverse categories like equity, debt, hybrid, and thematic funds? Let’s delve into the common return calculations used in average ROI mutual funds:

1. Absolute Returns: This measures the percentage change in the total value of the mutual fund from the time of purchase to the redemption of its units.
2. Annualised Returns: Calculated on a yearly basis, these debt funds returns are expressed as a percentage, providing a snapshot of performance over a specific period, even if it’s less than a year.
3. Compounded Annual Growth Rate (CAGR): CAGR is preferred for periods exceeding one year as it considers market fluctuations, offering a more accurate portrayal of returns over time compared to simple annualised average return on investment mutual funds.
4. Extended Internal Rate of Return (XIRR): Specifically tailored for SIP investments, where units are bought at different times, XIRR provides a precise measure of average ROI mutual funds, accommodating the varying investment durations inherent in SIPs. Find out more about the differences between CAGR and XIRR, with smallcase!

Calculating Mutual Fund Returns: Different Ways to Calculate Mutual Fund Returns

Now that you’re familiar with the four main ways of measuring mutual fund returns, let’s delve into how to compute them individually.

Absolute Returns

To calculate absolute returns, subtract the initial Net Asset Value (NAV)\ from the current NAV, divide it by the initial NAV, and multiply by 100. For instance, if you invested when the NAV was 50 and it’s now 75, your absolute return would be 50%.

Annualized Returns

To find annualized returns or mutual funds percentage rates returns, divide the absolute return by the investment period. This assumes a consistent growth rate over the investment period. For example, if your absolute return is 50% over three years, the annualized return would be 13.33%.

CAGR (Compounded Annual Growth Rate)

CAGR considers fluctuations in market value throughout the investment period. It’s calculated by considering the final investment value, initial investment amount, and the number of years invested. This method provides a more accurate representation of returns. For instance, if your investment grew from 50 to 75 over three years, your CAGR would be 14.5%.

XIRR

XIRR computation involves various inputs, including SIP amounts, dates of investment, redemptions, and redemption values. Due to the complexity of this calculation, many opt for using tools like MS Excel or specialized calculators. These tools streamline the process and offer more precise results, accounting for the varying market prices at different investment dates.

Factors Consider Regarding Calculating Mutual Fund Returns

When evaluating mutual fund returns, consider the following key factors:

• Timeframe: Evaluate mutual fund good returns over both short and long-term periods to gain a comprehensive view of performance.
• Benchmark Comparison: Compare the MF returns against a relevant benchmark index to gauge its performance relative to similar investments.
• Risk-Adjusted Returns: Assess high return mutual funds in relation to the level of risk taken by the fund, as higher returns may come with higher risk.
• Expense Ratio: Take into account the fund’s expense ratio, as higher fees can impact overall returns over time.
• Dividends and Distributions: Consider the impact of dividends and distributions on the best mutual fund returns last 10 years and tax efficiency.
• Consistency: Look for consistent return on liquid funds across different time periods, indicating stability and reliability.
• Past Performance: While not indicative of future results, past performance can offer insights into the fund manager’s skill in generating rolling returns of mutual funds.
• Investment Objective: Ensure the fund’s investment objective aligns with your own financial goals and risk tolerance, whether it’s growth, income, or a combination of both.

Calculating Mutual Fund Returns for SIP

SIP mutual funds returns are calculated using a simple formula:

P [(1+i)^n-1] * (1+i)/i.

Here, P represents the investment amount, n is the number of investment periods, and i is the periodic mutual fund interest rate. For instance, if you invest Rs 4,000 monthly for 24 months, with an expected return rate of 12% (i.e., 0.01 as the periodic interest rate), the future value can be calculated as 4000 x [(1+0.01)^24 – 1] * (1+0.01)/0.01, resulting in approximately Rs 108,316 at maturity.

Calculating Mutual Fund Returns for Lumpsum Investments

Investors evaluate lump sum investments by assessing various returns, such as absolute returns and simple annualized returns. Absolute return is straightforward to calculate, expressed as a percentage: (Current NAV – Initial NAV) / Initial NAV x 100, where NAV represents the fund’s net asset value per unit.

For instance, if your initial NAV was 25 and the current NAV is 40, your absolute return stands at 60% for a period under 12 months.

On the other hand, simple annualized return, reflecting potential earnings over a full year, follows a different formula: [{1 + absolute rate of return)^(365/days)] – 1.

To determine the compounded annual growth rate (CAGR) for investment periods exceeding 12 months, one formula is {[(current NAV/initial NAV)^(1/years)] – 1} x 100. If the mutual fund investment return duration is in months, adjust the formula by replacing 1/years with 12/months.

Alternatively, another formula for CAGR is CAGR = (current value/initial value)1/n – 1, where ‘n’ represents the number of years invested.

How Can You Use a Mutual Fund Returns Calculator?

Investors can leverage a mutual fund calculator online to determine their investment’s final return value based on the expected rate of return. By inputting the principal investment amount and expected rate of return, they can calculate the maturity amount and figure out the MF with highest returns. Conversely, inputting the expected maturity amount allows investors to predict their investment’s rate of returns.

To Wrap It Up…

Before investing in mutual funds, it’s crucial to consider various types of returns influenced by market performance and economic conditions. You can calculate mutual fund returns using online calculators to estimate your fund’s rate of return. Thorough research into mutual funds with good returns is essential prior to investment decisions.

FAQs