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How to Calculate Mutual Fund Returns?

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EVERY investor looks at the returns that they earn from mutual funds but often do not realise the importance of what the numbers say. Even more opaque is the situation about the manner in which the returns are actually calculated and how the details change with a change in some of the market conditions. It is important to understand what each of the figures actually mean and how they can be interpreted. Here is a closer look at the issue.

Returns:

 

Most people look at the returns from their mutual fund holdings and then decide about the performance of their fund.

These returns are often for a short time period and people tend to ignore the way in which they are calculated. The time period related to the returns matter because they will determine the way in which these are actually calculated. The actual figure is less important as compared to the manner in which these are calculated. There are two ways in which this is actually done.

Point to point returns:

As the name suggests, these returns are calculated from a certain point to another point. This means that there would be two time periods between which the figure would be calculated.

For example, if you are looking at a one-year return then you take the last net asset value and the figure for one year before and the value now. This is a clear example of a point-to-point return and it is a very simple way to calculate. What is important is that this return can be shown in a couple of ways. One is the absolute figure, where this route is used usually for a period that is less than a year. This will ensure that the returns for this period are actually what is seen so here there is a change of the amount that has been actually earned in the time period. So for example, a 15 per cent actual change over nine months represents the absolute return.

Annualised return:

Another way of showing the return is to make this annualised in nature. This is done when the time period is more than a year. For example, if the investor has invested for a period of three years, then at the end of this period if he is told that the returns that you earned in absolute terms was 55 per cent then this might not give a complete picture. In such a situation, if the investor is told that this is a certain annualised rate then it becomes easier to understand as the figure is actually brought down to an annual figure. The annualised figure is the return figure compounded over the specific time period. Also this can then be compared with other figures that are present in terms of the other instruments that are available in the market. The annualised return makes it easier to look at the various figures and it brings an element of standardisation to the returns

Selection of period:

 When it comes to the actual return, the selection of a certain time period is important because of the way in which market conditions can affect the situation. In case of a sudden rally or a slump in the equity markets, the immediate as well as the overall returns would be impacted. This can distort the figure and hence, the time period for which the returns have been calculated are important. This will enable the investor to understand how the situation has actually shaped up and what they have actually earned. A comprehensive look will also enable them to make better decisions with respect to their investments.

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