How to Calculate Mutual Fund Return?

What is Mutual Fund Return?

The profit or loss on your investment over a given time period is known as a mutual fund return. It shows how the fund's Net Asset Value (NAV) has changed as well as any income that the plan may have distributed.

When an investment has a positive return, its value has increased; when it has a negative return, its value has decreased. Since mutual funds make investments in securities related to the market, returns are not assured and may change over time. 

Different Ways of Calculating Mutual Fund Returns

Different investment situations require different methods of mutual fund return calculation.

Absolute Return

Absolute return measures the total percentage gain or loss without considering the investment period. It is best suited for investments held for less than one year.

Formula:

Absolute Return (%) = [(Current NAV – Purchase NAV) ÷ Purchase NAV] × 100

For instance, your absolute return would be 20% if you invested at a NAV of ₹20 and the current NAV is ₹24.

Annualised Return (CAGR)

The average yearly growth rate of a lump-sum investment kept for more than a year is displayed by the Compound yearly Growth Rate (CAGR). It is helpful for comparing long-term fund performance because it takes the investment period into account.

Formula:

CAGR = [(Ending Value ÷ Beginning Value)^(1 ÷ Number of Years)] – 1

For example, the CAGR is 10% annually if ₹1,00,000 increases to ₹1,61,051 in five years.

XIRR (Extended Internal Rate of Return)

XIRR is the ideal approach for SIPs because it is employed when investments are made on separate dates. It takes into account the timing of each installment as well as the total amount invested. Investors typically utilise Google Sheets, Excel, or online calculators due to the complexity of the calculation.

Trailing Returns

A fund's past performance over predetermined time periods, like one, three, five, or ten years, is measured by trailing returns. While historical performance does not ensure future results, they assist investors in comparing similar mutual funds.

Point-to-Point Returns

Point-to-point returns compare a fund's NAV between two specific dates. This method is useful for analysing performance over a selected period and comparing different mutual funds under similar market conditions.

The Difference in Mutual Fund Returns Calculation

Each return calculation method serves a different purpose. Selecting the right one helps investors evaluate performance more accurately.

Things to Consider about Mutual Funds Returns

Before making an investment decision, investors should take into account a number of other criteria, even if examining mutual fund returns is crucial. 

• Returns are dependent on the state of the market and can change. 
• Examine the fund's performance against comparable schemes and its benchmark. 
• Examine the expense ratio because more expenses may result in lower overall profits. 
• Align your financial objectives with the investing horizon. 
• Rather than concentrating solely on greater returns, think about risk-adjusted performance. 
• Don't choose a fund just because it has done well in the past.

How to Invest in Mutual Funds?

When you take a methodical approach, investing in mutual funds is a simple procedure. 

• Establish your financial objectives and decide whether you are investing for retirement, wealth creation, or another purpose
• Assess your risk appetite to choose between equity, debt or hybrid mutual funds.
• Complete your KYC by submitting the required documents through a SEBI-registered intermediary.
• Choose a suitable mutual fund based on its objective, performance, expense ratio and risk profile.
• Choose between a SIP or a lump-sum investment when investing through a registered platform or the asset management company (AMC). 
• Review your portfolio on a regular basis and adjust if your financial goals or risk tolerance change.
   

Modes of Investment for Better Returns in Mutual Funds

Various investment strategies are appropriate for various financial requirements.

Taxation of Mutual Fund Returns

The tax treatment of mutual fund returns depends on the type of scheme and the applicable provisions under the Income-tax Act.

• The tax laws that apply to stock mutual funds also apply to equity-oriented mutual funds. 
• The tax rules that apply to debt mutual funds are followed by debt-oriented mutual funds. 
• The type of fund and the holding term are two examples of the variables that affect capital gains tax. 

Conclusion

Investors can assess fund performance more precisely if they are aware of how mutual fund returns are determined. Different approaches such as point-to-point returns, trailing returns, CAGR, XIRR, and absolute return serve various investing scenarios. Selecting the appropriate method for calculating mutual fund returns helps you make smarter financial decisions and gives you a better understanding of the success of your investments. When choosing a mutual fund, investors should take risk, investment horizon, expenses, and taxes into account in addition to returns.