Mutual Fund Returns – What Are Types and Return Rates?

Want to grow your wealth over time? Mutual fund investments are the perfect choice for you. To track your investments, you require a precise understanding of how to calculate mutual fund returns.

Mutual Fund Returns generally calculate the growth and decline of your investment to understand that not all mutual funds generate the same returns. Thus, review your performance regularly to sort out the outperforming or underperforming funds. 

For enthusiastic investors like you rely on financial advisors or calculators to estimate your mutual fund returns. Because one of the most crucial steps to understanding the financial landscape is to learn how much returns your investments deliver. The amount of your return depends on the mutual fund’s performance. Keeping this in mind, this blog will explore the diverse types of mutual fund returns that should know about while assessing the overall performance.

Factors That Affect the Performance of Mutual Fund Returns

There are specific factors to take into consideration while analyzing your mutual fund returns: 

• Expense Ratio: The expense ratio in a mutual fund reflects the expenses charged and annual fees. High expense ratios slump the long-term performance of your returns. 
• Timeframe: One of the significant factors to focus on is the investment tenure for which returns are being assessed. This can offer a more comprehensive understanding of your fund’s performance. 
• Dividends and Distributions: While calculating your mutual fund returns, add any dividends and distributions received as they significantly affect the tax efficiency. 
• Risk-adjusted Returns: Have a coherent understanding of the relation between returns and risks. It is crucial to find a suitable fund for your investment goals. 

Three additional factors that should be given attention are past performance, consistency, and investment objectives. Seek consistency across different periods to ensure that the current returns match your long-term investment objectives, financial future, and risk tolerance capabilities.

Moreover, past performance may not guarantee any results in the future but they do offer knowledge about the fund’s ability to generate interest, however, this depends heavily on market conditions. 

Some of the Significant Mutual Fund Returns You Should Know About and How To Calculate Them

Annualized Returns

Annualized returns help you compare different mutual funds with diverse tenures. It refers to mutual fund returns that investors receive annually in consideration of the compound interest rate. In simpler terms, the annualized returns calculated method measures an investment growth as if it grows at a steady rate – on an annually compounded basis. 

Calculating annualized returns offers a concrete picture of the mutual funds when they are traded for different periods. The general formulae used to calculate annualized returns are – 

=> Annualized Returns = [(Current Net Asset Value/Purchase Net Asset Value) ^ (1/holding period in years)) – 1]*100 

Imagine that you invest Rs. 3,00,000 that grows to Rs. 5,50,000 in two years. The annualized return in this case would be:

=> Annualized Returns =  [(5,50,000/3,00,000) ^ (½) – 1]*100 = 35.4%

Absolute Returns

Absolute return refers to the return calculated in terms of the growth/loss percentage irrespective of the tenure period. They are used to calculate mutual fund returns for a tenure that lasts for less than a year. 

The overall growth i.e., the absolute return, is signified in absolute terms, not relative or comparative. The general formulae used to calculate an absolute return are quite easy – 

=> Absolute Return = [(Selling Price – Cost Price)/Cost Price] * 100

For example, the current value of your investment is Rs. 4,00,000  while the initial amount was Rs. 2,50,000. Then your absolute return can be calculated as: 

=> Absolute Return =  [(4,00,000 – 2,50,000)/2,50,000)]*100 = 60%

Hence, the investment or tenure period is irrelevant as the example exemplifies. 

Rolling Returns

Rolling returns calculate the average annualized mutual fund returns over a specific period – daily, weekly, or monthly until the selected investment tenure concludes. The overall returns are then compared against a similar duration of the investment scheme’s fund categories or benchmark index such as Nifty or BSE-200, and lastly, represented in a graph.

For example, your investment period is five years and the start date of calculating the rolling returns is February 5, 2010. Then, you need to calculate the annualized mutual fund return rates from February 5, 2010, to February 5, 2025, and on and on. 

Calculating the returns at specific periods helps understand the fund’s performance and whether it has improved consistently. Rolling returns are one of the most reliable methods of calculating mutual fund returns. 

Trailing Returns

Trailing returns are annualized returns over a specified trailing period that concludes ‘today’. These are relevant if you want to analyze the past performance of your funds. 

Trailing mutual fund returns are calculated from a specific date of any recent year to any past date i.e., as far as 1 to 10 years. It is calculated as:

=> Trailing Return = [(Current Net Asset Value/Net Asset Value at the start of the trailing period) ^ (1/trailing period)] – 1

For example, assume that the Net Asset Value (NAV) of your investment is Rs. 5000. The initial NAV of the same mutual fund two years ago was Rs. 2000. Hence, the trailing return on this mutual fund investment can be calculated as:

=> Trailing Return =  [(5000/2000)^(½)] – 1 = 58.1%

Total Returns

Total returns are the overall gains from your mutual fund returns along with dividends, interest, and capital gains over a definite period. It may happen that two companies, A and B, show the same growth percentage in a year but A has paid out a dividend for their investors. In this case, A showcases better performance as compared to B. 

Total returns are significant as they help understand a mutual fund’s overall performance. It focuses on the larger picture than just the fluctuations in prices. 

Moreover, it is relatively easy to calculate total returns on your mutual fund investments:

=> Total Returns = [(Total capital gains + dividend)/total investment]*100

For example, you invested Rs. 50,000 by purchasing 250 shares with a value of Rs. 50 each. After a year, the NAV is Rs. 55 per share. Along with this, you receive a dividend of Rs. 15 per share. Hence, the total returns can be calculated as:

=> Total Returns = {[(55 – 50) * 250 + (15 * 200)]/50,000} * 100 = 10%

As concluded above, your total returns in this scenario amount to 10%. 

Point-to-Point Returns

Point-to-point returns refer to annualized returns generated between two time periods. It is to understand the performance of your mutual funds between two significant periods. Here, the start date and the end date of your investment tenure are important to calculate the overall returns:

=> Point to Point Return = [(Net Asset Value at the end date – Net Asset Value at the start date)/Net Asset Value at the start date] * 100

For example, the NAV on 6 September 2000, was Rs. 100. Meanwhile, the NAV on 31 January 2001 was Rs. 120. The point-to-point returns calculated here are:

=> Point to Point Return = [(120-100)/100] * 100 = 20%

Compounded Annual Growth Rate (CAGR)

CAGR refers to the annual return over a specific time that ends today. It helps you assess the average annual growth of your investment by offering a standardized measure for comparison over time. This is effective in representing the fund’s performance across multiple years without any hassle. 

It can be calculated as: 

=> CAGR = {[(Present Net Asset Value/Initial Net Asset Value) ^ (1/investment period)] – 1} * 100

For example, you make a lump-sum investment of Rs. 1,00,000 in 2020. The initial NAV is Rs. 50 but after five years, it increases to Rs. 75. The CAGR for this case can be calculated as:

=> CAGR = {[(75/50) ^ (⅕)] – 1} * 100 = 8.44%

Extended Internal Rate of Return (XIRR)

External Internal Rate of Return is a unique method of calculating SIP investments. The varying durations during each installment can be challenging to calculate. Hence, traditional methods of calculations may not work. To overcome this, we use XIRR in Excel which calculates the internal return rate taking into account the multiple cash flows. 

XIRR is a mutual fund returns calculating method that considers the time and the amount that flows in and out of the mutual fund. It takes into account the initial investment along with subsequent investments and withdrawals. This method helps draw a more accurate idea of the returns when the cash flow is involved. 

To calculate the returns through this method, you consider the SIP amount, redemption date, date of SIP investments, and redemption amount. 

=> Formulae for XIRR = XIRR (Values, Dates, Guess)

To find the returns, there has to be a cash outflow and an inflow. Hence, they should be indicated using a negative and positive sign while using the XIRR method. 

Concluding Points!

Mutual funds allow you to participate in the market and grow your wealth effectively. Understand the types of mutual fund returns, their risk-return profiles, and how to calculate them to harness the maximum potential fund return. 

The keys to the success of your mutual fund investments are research, patience and consistency. Remember that while you should review the funds’ performance regularly, it should also be reasonable. 18 to 24 months is a reasonable period to review whether the funds in your investment portfolio generate promising returns.

Make a separate list of funds, and categorize which ones are underperforming as compared to other mutual funds or the benchmark index. The fund performing well today might not consistently perform well every year. The fund manager takes account of the fund’s portfolio, while you, as an investor, review your investment portfolio. 

Be mindful! Avoid disrupting your portfolio allocation unless it requires a change. 

Please share your thoughts on this post by leaving a reply in the comments section.

Also, check out our recent post on: “What is the 50/30/20 rule for Budgeting?”

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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.