If you don’t have the knowledge to directly buy stocks or invest in equities or other investable instruments, then mutual funds are the best way to capitalize your money. But before choosing or investing in any mutual fund, you should calculate the returns and compare them to know which one is giving the best returns.
Though, while choosing mutual funds, you can see the returns shown by all the companies selling the mutual funds. But understanding the mechanism of mutual fund returns like how it works and how it’s calculated is very important to know the absolute returns and differentiate between the mutual funds offered by different companies.
Topic-Covered
- What is Mutual Funds Returns?
- How to Calculate Mutual Funds Returns?
- Ways of Calculating the Mutual Funds Returns:
- What is a Mutual Fund Calculator?
- How to use a Mutual Fund Calculator?
- Conclusion
What is Mutual Funds Returns?
Mutual fund returns mean the rate of returns in terms of profit or loss you get after investing your money for a specific period. It is used to measure the profitability and performance of the mutual fund, which you can use to compare with mutual funds offered by different companies. The returns are calculated and represented in percentage that shows the current value of your investment while considering factors like an increase in the value and dividend income, etc.
Usually, mutual funds are calculated annually, but you can also calculate for different timeframes, such as daily, weekly, monthly, quarterly, or half-yearly. Based on these returns, you can expect or calculate the future value of the money you invest in such mutual funds.
However, mutual fund returns are influenced by various factors like market conditions, fund managers’ investment strategy, transaction charges, and other expenses. Hence based on these factors, the mutual fund returns also keep changing, but maintaining the highest and most consistent returns is one of the highest motives of all mutual fund managers.
How to Calculate Mutual Funds Returns?
The returns on mutual funds can be calculated in different ways, or you can say the mutual funds show their returns in different ways. The returns can be calculated annualized, CAGR, absolute returns, and XIRR as per the different investment perspectives. To understand these returns better or how they are calculated, let’s find out different calculation methods of mutual fund returns.
Ways of Calculating the Mutual Funds Returns:
Absolute Returns
Absolute returns are a simple and straightforward calculation method that shows the total return on your investment in terms of absolute returns. It is the return you get on your investment, the time horizon is not considered here only the absolute return is shown here. Based on these absolute returns, you can see the total value of your investment.
Absolute Return Formula: (Present Value of Investment – Initial Value of Investment) / Initial Value of Investment x 100
In the mutual fund industry, the value of investment is represented by NAV or net asset value, which represents the price of one unit of mutual fund. Hence, you have to consider the present value of NAV and the value of NAV at the time of investment.
For example, suppose you have invested Rs 1 lakh in mutual funds with an NAV of Rs 100 per unit. Now after 3 years, the value of your investment is Rs 1 lakh 30 thousand with an NAV of Rs 130 per unit. Here, when you put the desired values in the formula, you will get an absolute return of 30% on the amount you have invested in the mutual fund.
Annualised Return
Calculating the annual return in a mutual fund is useful when the time period is less than one year. It tells you on an annual basis how you are earning from your investment. A simple annualized return is calculated with the formula given below.
Simple Annualized Return: (1 + Absolute Return) ^ (1 / N) – 1
In this annualized return formula, N is the total number of periods considered for the measurement, and “1” is divided by “N”. To get the rate of return on a daily basis, you can also use 365 instead of 1. Considering the values from the previous example, the calculation is:
(1 + 0.30) ^ (1 / 3) – 1 = 9.14%
Here you can see that with a total return of 30% over three years, when annualized it will become 9.14%. Calculating the annualized return is useful when you want to know the rate of returns on your investment for less than one year.
Compounded Annual Growth Rate (CAGR)
The compounded annual growth rate is the average annual growth rate of your investment. It provides the standardized measurement of interest you earned on your principal amount and on your interest income. It shows the standardized measure to compare investment performance and gives you a better view of actual returns on your investment.
CAGR Calculation Formula:
(Final Value of Investment / Initial Value of Investment) ^ (1 / n) – 1
(130000/100000) ^ (1/3) – 1 * 100 = 9.14%
Extended Internal Rate of Return (XIRR)
XIRR is a more comprehensive way of calculating the return on your investment, primarily used for systematic investment plans (SIP). In SIP, a fixed amount of money is invested at regular intervals like weekly, monthly, quarterly, or yearly. XIRR helps calculate the rate of returns on investments done at different periods, considering any withdrawals during that time.
XIRR Calculation Formula: To calculate XIRR on mutual funds, use the Excel sheet and input the necessary values or use the formula:
(NPV (Cash Flows, r) / Initial Investment) * 100
Steps to Calculate XIRR in Excel:
- Step 1: Make a table with two columns.
- Step 2: Enter the dates of SIP in the first column and SIP amounts in the second column.
- Step 3: In the last row, add the redemption date and redemption amount.
- Step 4: Use the XIRR function in Excel.
- Step 5: Select the values column for SIP values and the dates column for the respective dates.
- Step 6: Skip the “Guess” parameter.
- Step 7: Format the result in percentage or multiply by 100 to get the XIRR in percentage terms.
Using these steps, you can calculate the returns from SIP investments using the XIRR function in Excel. However, in the digital age, the easiest way to calculate these types of returns is by using an online mutual fund calculator, widely available from mutual fund companies and financial institutions. Let’s explore mutual fund calculators and how they work.
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What is a Mutual Fund Calculator?
A mutual fund calculator is an online tool that helps calculate different types of returns on investments. These calculators typically allow you to choose the type of return you wish to calculate, enter the required values, and provide results instantly. Though the interfaces of these calculators may differ, the formulas they use remain consistent.
How to use a Mutual Fund Calculator?
To use a mutual fund calculator, visit a reliable website offering such tools. You will need details like your initial or monthly investment, the total value of your investment, the number of years of investment, and the estimated rate of returns.
After gathering the data, select the type of return (absolute, annualized, CAGR, or XIRR) you want to calculate, enter the values, and click calculate to get the results. These online calculators also display detailed breakdowns of your investments and returns.
Conclusion
Mutual fund returns are based on your investment, whether through lump sum amounts or SIPs. The calculation of mutual fund returns depends on the type of return, such as absolute, annualized, CAGR, or XIRR. While manual calculations are possible, the most efficient way is to use an online mutual fund calculator, which provides quick and accurate results.
To calculate your mutual fund returns accurately, try using the Religare Calculators.
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