Skip to main content

Understand the Mutual Funds returns formula

The aim of any investment is to earn returns. It is necessary, then, to understand how to read these.

The simplest is the average annual return, the arithmetic mean of the returns earned over a period. It is prone to be the most misused indicator, to show unrealistic returns. Let us say you invest `100,000 in a mutual fund (MF).

At the end of the first year, the growth is 100 per cent and at the end of second year, a fall of 50 per cent. At the end of two years, you have not gained anything. But, the average annual return method will show net return of 25 per cent.

When the gain or loss in a portfolio is expressed as a percentage of the invested capital, it is known as the absolute return. is calculated as the difference of current value and cost value, divided by cost value, which is 64.14 per cent. But, this does not take into account that this return has been earned over more than a year.

If the holding is for over a year, we usually look at the compounded annual growth rate (CAGR). This gives you the year-on-year returns. The formula is ((F/S)^(1/n))1. F = Final value, S = Initial value and n= holding period. In the table, CAGR is 22.65 per cent. It is assumed the gains are reinvested every year. So, the investment grew to `122,646 in first year, 150,422 in second year and `164,136 at the end. But this might not be true.

The fund may have fallen drastically in one year and given excellent returns the next year. CAGR smoothens the returns and does not considering volatility over the holding period. But, it does make returns comparable across funds.

In case of a series of cash flows for which the rate of return is to be calculated, XIRR is used. This considers the timing of inflow and gives a better picture than CAGR. It is useful in calculating the rate of return for investments like SIPs.

XIRR is 25.25 per cent. Here, most investors would calculate the return as 13.33 per cent. That's incorrect as the method does not take into account different timings of each cash flow. Again, it is assumed the cash is reinvested at the same rate. But, the rates fluctuate and may not be available when reinvesting.

Quoting returns delivered over less than a year as annual return uses simple annualised returns. It is not misleading. It is used in calculating returns in less volatile investments like debt funds. It will not work for equity funds. Simple annualised return= returnsX (365/no. of days). This is not a real return, but can be used for comparison across funds, as the actual return in a year may be different than what is quoted.
 
All MF returns are historic data. Past performance may not be sustained. All these return calculations then become essentially tools to compare the plethora of funds in the market. These will also be used to compare the performance against the benchmark. A fund manager's job in an actively managed fund is to surpass the benchmark. Comparing the returns to the benchmark will tell if the investment objective is met.
 

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

Popular posts from this blog

Bear markets may kill, but bulls always return with vengeance

Average Gain Between Any Two Downturns Has Been 186% IF you have lost a fortune in shares by now, the best way to make it up perhaps could be by buying some more. Since the Great Depression of 1929, the world has undergone 12 major bear market phases. The average bear market has lasted about 22 months, and the market has fallen by an average of 51%. However, the average gain during the bull market between any two downturns has been an eye-popping 186%. The index here in question is the S&P 500. Bull markets — after every recessionary phase — have always been good for investors. All major bull rallies since end-1930 have resulted in markets gaining between 50-500%. Historic numbers show that the magnitude (size or breadth) of a bull market is much heavier than that of a bear market. The million dollar question is: Are we at the threshold of another bull market rally? Markets could go up intermittently, but convincing rallies will take time to happen. The current bear phase is...
Read more

NRIs and direct taxes code (DTC)

DTC Proposes To Do Away With Special Provision That Allows NRIs Liberalised Duration Of Stay In Country      THE new direct taxes code could bring a large number of global Indians under the tax net, as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance.    The new legislation, introduced in Parliament on Monday, says an individual shall be a resident of India in any financial year if he is in the country for more than 59 days in that year, and has been has been India for more 365 days in four preceding financial years. A number of Indian industrialists including Vedanta's Anil Agarwal and Essar's Ravi Ruia have acquired non-resident status over the years.    The DTC has only attempted to clean up the provision in line with the laws globally. A phrase "being outside India" in the existing income tax law exempted individuals who stay outside the country for six months from paying taxes. This was prone ...
Read more

Stick to Good Fund Manager who Can Multiply Your Investment

A manager may be the difference between the best and worst funds. Here's how you can find the right one    Does a mutual fund manager make a difference to your investment? The answer may not be as easy as you think, since most best-performing mutual funds have moved away from individualistic fund management to process-driven methods, limiting the scope of an individual's role in investment decisions. In fact, many fund managers would speak at length about how the "system" their fund house has in place makes their task of picking stocks easy even though it restricts their freedom. Still, the question is important, especially after recent reports that the Securities and Exchange Board of India ( Sebi ) may ask fund managers to disclose to investors their track record of managing money. Let us take a look at the universe of large-cap funds over the past five years. According to Value Research, an independent mutual fund tracking firm, the topper in the category is DSP...
Read more

Tata Fixed Income Portfolio Fund dividend

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)       Tata Mutual Fund has announced dividend under the dividend option of Tata Fixed Income Portfolio Scheme B2 Plan A-DQ, Tata Fixed Income Portfolio Scheme B2 Reg-DQ and Tata Fixed Income Portfolio Scheme B2 Direct-DQ. The record date has been fixed as August 29, 2013. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Onlin...
Read more

EPFO will Invest through ETFs

  EPFO set to invest more through ETFs   Labour minister says decision on increasing investments from 5% to 15% of deposits to be taken this week.   Retirement fund body EPFO will this week decide on in creasing investments in stock markets through ETFs , as they have started giving returns, Labour Minister Bandaru Dattatreya has said.   "A report will be presented before the Central Board of Trustees on (ETF) investments of the EPFO on July 7. Now the report is positive. We will decide quantum of percentage increase. According to the percentage (increase), the amount of investment will also increase," Dattatreya said.   An ETF trades like an individual stock in the market and is generally a basket of various securities such as shares, bonds, commodities and indices. The EPFO started investing in ETFs last August. It had started by investing 5% of its investible deposits in ETFs last fiscal. Now, there is a move to increase the pro portion of such investments in this fisc...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now