Investing your money in mutual fund schemes is a great step in the right direction, but have you ever wondered why? The simplest answer to the ‘why’ of investing is – ‘to get mutual fund returns’. After all, they can help you fulfil all your big and small goals.But to make sense of these returns and what they imply, you need to know about each of them.
Types of mutual fund returns
- Absolute return: The growth in your investment, irrespective of the tenure, is expressed in terms of a percentage. This percentage is the absolute return. For instance, if you invested Rs. 1 lakh in a mutual fund, and its value is now Rs. 1.5 lakh, your absolute rate of return will be 50% because your investment grew by Rs. 50,000. You could earn this in three years, six years or any number of years. The absolute return only gives you the profit and does not focus on the time taken to earn it.
- Compounded Annual Growth Rate (CAGR): You may also know this as annual returns. As the name suggests, CAGR helps you understand the profit you earn in a year. They can help you break down your investment returns per year, unlike absolute returns.
Technically speaking, here is how CAGR is calculated:
CAGR = ((Current Net Asset Value (NAV)/Purchase NAV) ^ (1/number of years)) – 1]*100
But don’t let its complexity scare you; you can simply use an online CAGR calculator to estimate your returns.
Also, the NAV that you see in the formula above is the per-share value of a fund. It plays a crucial role in calculating mutual fund returns.
- Point to point return: Point to point return helps you understand your returns earned between two points in time. This type of return is calculated on the basis of the NAV. For example, if the NAV at the beginning of the year was Rs. 20, which increased to Rs. 30 at the end of the year, the point to point return will be:
P2P return = [(30-20)/20] * 100 = 50%
- Extended internal rate of return or XIRR: XIRR can be a benchmark to understand mutual fund returns when investing through a systematic investment plan (SIP). SIPs make multiple small investments at different points in time. Moreover, you may withdraw your investment in parts. XIRR considers all of these inflows and outflows and calculates the average return from each instalment.
You can use a SIP mutual fund calculator or Microsoft Excel to calculate XIRR. For the latter, you need to enter the date and amount of each SIP. SIP amounts, top-ups, etc., must be negative values since they are your cash outflows, whereas redemption, dividends, Systematic Withdrawal Plan (SWP) receipts, etc., must be positive since they are your cash inflows.
- Rolling returns:Similar to point to point returns, rolling returns also give you the profits or losses made during a specific term. However, it also helps you understand how the fund specifically performs during every market condition.
Rolling mutual fund returns reflect the fund’s performance during bull and bear markets.
- Total returns index:This type of return calculates the price appreciation of stocks as well as the dividends and interest paid. This is a comprehensive calculation that helps you understand capital appreciation and other profits made through dividends, etc.
How to use different kinds of returns?
Along with comparing the features of mutual funds, it can also help to compare the past mutual fund returns before investing. However, you must note that past performance does not imply anything about the fund’s future performance. But the correct analysis will help you make better investment decisions.
You can use returns to decide the kind of mutual fund you want to invest in. They also help you understand your profits and how a fund has performed across market conditions at mutual fund redemption time.
Conclusion
Now that you know the different types of mutual fund returns, you can craft better investment plans to reach your financial goals.
An investor education initiative by Edelweiss Mutual Fund
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
