Calculating Returns on Mutual Funds: If you lack the expertise to purchase stocks or invest in equities and other financial instruments directly, mutual funds represent an excellent option for growing your capital. However, prior to selecting or investing in any mutual fund, it is essential to assess the potential returns and make comparisons to identify which fund offers the most favorable returns.
When selecting mutual funds, it is possible to view the returns presented by various companies that offer these funds. However, it is crucial to comprehend the underlying mechanisms of mutual fund returns, including how they function and how they are calculated. This knowledge is essential for accurately assessing absolute returns and distinguishing between the mutual funds provided by different firms.
What are the returns on mutual funds?
Mutual fund returns refer to the profit or loss percentage you receive after investing your capital over a designated timeframe. This metric is essential for assessing the profitability and performance of a mutual fund, allowing for comparisons with offerings from various companies. The returns are expressed as a percentage, reflecting the current worth of your investment while taking into account elements such as appreciation in value and dividend earnings, among others.
Typically, mutual fund returns are assessed on an annual basis; however, they can also be evaluated over various periods, including daily, weekly, monthly, quarterly, or semi-annually. By analyzing these returns, you can estimate or project the future value of your investments in these mutual funds.
Mutual fund returns are affected by a range of factors, including market conditions, the investment strategies employed by fund managers, transaction fees, and other associated costs. As a result, these returns fluctuate based on these elements. Nevertheless, achieving the highest and most stable returns remains a primary objective for all mutual fund managers.
What is the Method for Calculating Returns on Mutual Funds?
The performance of mutual funds can be assessed through various calculation methods, reflecting different perspectives on returns. These returns may be expressed in terms of annualized figures, Compound Annual Growth Rate (CAGR), absolute returns, and Extended Internal Rate of Return (XIRR). To gain a clearer understanding of these returns and their calculation methods, let us explore the various approaches to determining mutual fund performance.
Methods for Calculating Returns on Mutual Funds:
Total Returns
- Absolute returns represent a clear and uncomplicated method for calculating the total return on your investment, expressed solely in terms of absolute figures. This metric reflects the return generated by your investment without taking the time horizon into account, focusing exclusively on the total return. By analyzing these absolute returns, you can assess the overall value of your investment.
Absolute Return Calculation: (Current Value of Investment – Original Value of Investment) / Original Value of Investment x 100
Mutual Funds: In the mutual fund sector, the investment value is indicated by the net asset value (NAV), which reflects the price of a single unit of the mutual fund. Therefore, it is essential to take into account both the current NAV and the NAV at the time of your investment.
Consider a scenario where you have invested Rs 1 lakh in mutual funds, with each unit having a net asset value (NAV) of Rs 100. After a period of three years, your investment has grown to Rs 1 lakh 30 thousand, with the NAV now at Rs 130 per unit. By applying the relevant values to the formula, you can determine that your absolute return on the mutual fund investment is 30%.
Yearly Return Rate
Determining the annual return on a mutual fund is beneficial for periods shorter than one year. It provides insight into your earnings on an annual basis from your investment. The straightforward annualized return can be computed using the formula outlined below.
Annualized Return Calculation: (1 + Absolute Return) ^ (1 / N) – 1
In the formula for annualized return, N represents the total number of periods taken into account for the calculation, while “1” is divided by “N”. For daily return calculations, you may substitute “1” with 365. Using the values from the earlier example, the computation is:
(1 + 0.30) ^ (1 / 3) – 1 = 9.14%
This analysis shows that a total return of 30% over a three-year period translates to an annualized return of 9.14%. Understanding the annualized return is beneficial for assessing the rate of return on investments held for less than one year.
The Compound Annual Growth Rate (CAGR)
Mutual Funds: The compounded annual growth rate (CAGR) represents the average annual growth rate of an investment. It serves as a standardized metric for assessing the interest earned on both the principal and the interest income. This measure allows for effective comparison of investment performance and offers a clearer perspective on the actual returns generated by your investment.
1. The method for determining the Compound Annual Growth Rate (CAGR) is outlined as follows:
The ratio of the Final Value of Investment to the Initial Value of Investment. ^ (1 / n) – 1
^ (1/3) – 1 * 100 = 9.14%
Extended Internal Rate of Return (XIRR) is a financial metric used to calculate the annualized return on investments that have irregular cash flows over time.
XIRR offers a more detailed method for assessing the return on your investment, particularly in the context of systematic investment plans (SIP). In a SIP, a consistent sum of money is invested at regular intervals, such as weekly, monthly, quarterly, or annually. XIRR facilitates the calculation of the rate of return on investments made at various times, taking into account any withdrawals that may occur during the investment period.
XIRR Calculation Formula: To determine the XIRR for mutual funds, utilize an Excel spreadsheet to enter the required values or apply the formula directly.
(NPV (Cash Flows, r) / Initial Investment) * 100
To compute the XIRR in Excel, follow these steps:
- Begin by creating a table that consists of two columns.
- Input the SIP dates in the first column and the corresponding SIP amounts in the second column.
- In the final row, include the date of redemption and the amount to be redeemed.
- Utilize the XIRR function available in Excel.
- Choose the column containing SIP values and the column that lists the corresponding dates.
- Omit the “Guess” parameter.
- Present the outcome as a percentage or multiply by 100 to express the XIRR in percentage format.
By following these steps, you can determine the returns from SIP investments utilizing the XIRR function in Excel. Nevertheless, in today’s digital landscape, the most convenient method for calculating such returns is through an online mutual fund calculator, which is readily accessible from various mutual fund firms and financial institutions. Let us delve into the functionality of mutual fund calculators and their operation.
Mutual Fund Calculator What is?
A mutual fund calculator is a digital tool designed to compute various investment return types. Users can select the specific return they want to assess, input the necessary data, and receive immediate results. While the layouts of these calculators may vary, the underlying formulas they employ are uniform.
What is the process for utilizing a Mutual Fund Calculator?
To utilize a mutual fund calculator, access a trustworthy website that provides these tools. You will require information such as your initial or monthly contributions, the overall value of your investment, the duration of the investment period, and the anticipated rate of return.
Once you have collected the necessary data, choose the type of return you wish to compute—whether it be absolute, annualized, CAGR, or XIRR. Input the relevant values and click on the calculate button to obtain your results. These online calculators also provide comprehensive analyses of your investments and returns.
In summary,
The returns from mutual funds are determined by your investment approach, whether you choose to invest a lump sum or through Systematic Investment Plans (SIPs). The method of calculating these returns varies depending on the type, including absolute, annualized, Compound Annual Growth Rate (CAGR), or Extended Internal Rate of Return (XIRR). Although manual calculations can be performed, utilizing an online mutual fund calculator is the most effective method, offering rapid and precise results.