How are mutual fund returns calculated?
Introduction:
Mutual fund investments are one of the most popular investment options for Indians, with thousands of investors turning to them for wealth creation, tax savings, and long-term financial growth.
Having said that, one must clearly understand how to calculate the average returns on Mutual Funds, as it can help them assess their profitability and performance. Calculating average returns on Mutual Fund investments gives an idea about the fund’s growth and performance, according to which, one can make informed decisions.
In this article, we will explain different methods through which you can calculate the average returns on your mutual funds.
How Can Calculating Mutual Fund Returns Help?
It goes without saying that when you understand how your mutual fund returns are calculated, you are not just tracking numbers, you are also gaining control on your investments. Here are some of the reasons why you must calculate your mutual fund returns:
- You can track your fund performance accurately
- You can compare how your funds fare against Nifty, Sensex, etc.
- You can avoid emotional decisions
- You will understand the power of compounding, and how your small amount grows over time
- It helps you decide when to switch, hold or pause
- You will be able to speak the same language as your mutual fund advisory expert
Different Methods to Calculate Average Mutual Fund Returns:
There are different ways to calculate the average returns on your mutual funds. Here are some of them:
Absolute Return:
Absolute Return refers to the upward or downward movement of your investment in percentage, and requires only initial and current NAV (Net Asset Value) for calculation. This method of calculating mutual fund returns is used for funds, which are invested for one year or more.
Formula for Calculation Absolute Return is:
Absolute Return = {(Present NAV – Initial NAV) / Initial NAV} x100
For example, if the initial NAV was 50 and the current NAV is 60, the absolute return will be 20%.
Annualised Return:
In this method, Simple Annualised Return (SAR) is used to calculate the annual return for a complete year. The formula to calculate Annualised return is:
SAR = [(1 + Absolute Return) ^ (365/t)] – 1
Where,
- Absolute Return is the total return that an investment has achieved over a period of time. (calculation is: {(Present NAV – Initial NAV) / Initial NAV} x100)
- t: The number of days for which the investment was held
Taking the absolute return as 20%, over a period of 9 months, SAR will be
SAR = [(1 + 20%) ^ (365/270)] – 1 = 27.95%
CAGR (Compounded Annual Growth Rate)
CAGR is a standard measure to evaluate a mutual fund’s performance, covering multiple years. The average annual growth rate on your investment can be determined using the Compounded Annual Growth Rate. The formula through which you can calculate CAGR is:
CAGR = [{(Present NAV / Initial NAV) ^ (1 / Number of years)}- 1] × 100
For Example: If you invest INR 1 lakh in a Mutual Fund in 2018 with an initial NAV of INR 100 and after 5 years in 2023, the NAV increases to INR 200.
CAGR = {[(200 / 100) ^ (1 / 5)] – 1} × 100
CAGR = 14.9%
XIRR (Extended Internal Rate of Return):
XIRR uses cash flow and timing to calculate the average returns on mutual fund investments. The calculation depends on initial investment, subsequent investment and withdrawals. Here is the formula for XIRR”
XIRR = XIRR (Values, Dates, Guess)
Following are the steps involved:
- Create a table with two column – SIP Dates and Corresponding Amounts
- Enter redemption dates and amounts
- Use Excel XIRR function
- Enter the Values and dates in respective columns
- Leave the Guess parameter completely
- Multiple it by 100
Factors Influencing Mutual Fund Returns:
Mutual fund returns are shaped by a variety of factors, some within your control and others not. Knowing what impacts your returns can help you choose the right fund, stay realistic about performance, and plan better for long-term goals. Here are some of the factors:
- The actual returns depend on performance of the securities
- The plans of fund manager and choices also affect the fund’s performance
- Changes in the Government and economic policies also impact the performance
- The size of the fund also has an impact
- Money flow can also impact the performance of the mutual funds
- Total expenses ratio is another factor influencing mutual fund returns
What is the Average Return of Mutual Funds?
The average return on the mutual fund investment varies with the kind of fund you are talking about. Here is the breakdown:
- While equity mutual funds offer 9-12% annual returns over the long term, they also carry more risk.
- Investing in bond funds can bring more stability, but the yield is also around 3-5% yearly.
- Balanced or hybrid funds offer moderate risk and return around 5-8%.
- Index funds offer return of 5-8% depending on the market performance
- Sector funds like tech and pharma are very volatile, but also offer higher returns
Conclusion:
Understanding how mutual fund returns are calculated is like learning to read the fuel gauge in your car. You may not need to know every formula, but knowing what impacts your returns can save you from costly mistakes and emotional decisions.
Whether you’re using SIPs, lump sum, or goal-based investing, calculations guide your journey. And when in doubt, seek help from trusted mutual fund advisory firm who can decode these numbers and match them to your financial story.
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