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How to Calculate Mutual Fund Returns

Posted on 05-Jun-2024

6 min read

Unlock the secrets of how to calculate mutual fund returns in this guide by Shriram AMC. Learn how to calculate absolute returns, XIRR, and CAGR for your portfolio and make informed decisions.

Table of Content

Ever wondered how much money you've made (or lost) on your mutual fund investments? Tracking mutual fund returns is essential for understanding the performance of your portfolio and making informed investment decisions. But how do you calculate these returns?

In this blog post, we'll walk you through a step-by-step guide on how to calculate mutual fund returns, equipping you with the knowledge to confidently assess your investments.

What is Mutual Fund Return?

A mutual fund return is the profit or loss derived from investing in a mutual fund schemes over a specified period. It reflects the change in value of your investment over time, factoring in elements like market performance, dividends, and interest.

Mutual fund returns are calculated for various timeframes, allowing investors to assess the investment's success and compare different funds.

This return is a critical metric, reflecting the fund manager's prowess in navigating markets and how well the fund aligns with your financial goals and risk tolerance. Understanding mutual fund returns in the context of the Indian market, with its unique economic dynamics, is crucial for informed investment decisions.

Different Ways of Calculating Mutual Fund Returns

Mutual fund returns can be calculated using several methods, each offering unique insights into the fund's performance. Understanding these different approaches is crucial for investors to accurately evaluate their investments. Here are the key methods used to calculate mutual fund returns:

1.    Absolute Returns: This is the simplest method for calculating mutual fund returns. Absolute returns measure the total return of an investment over a specific period, regardless of the investment duration. It's calculated as (Current NAV - Initial NAV) / Initial NAV * 100.

For example, let's say you invest Rs. 10,000 in a mutual fund with a starting NAV of Rs. 10 per unit (1000 units). After a year, the NAV increases to Rs. 12. Your current investment value is Rs. 12,000 (1000 units * Rs. 12 NAV).

Absolute Return = ((Rs. 12 - Rs. 10) / Rs. 10) * 100 = 20%


2.    Annualized Returns: When investments span over multiple years, annualized returns are a more appropriate measure. This method converts the total return of an investment into an average yearly return. It's an effective way to compare the performance of different investments over the same time frame, providing a clearer picture of an investment's performance.

It’s calculated as Absolute Return / (Holding Period in Years) * 100.

For instance, consider the previous scenario. You invest in January and sell in June (holding period of 6 months or 0.5 years).
Annualized Return = (20%) / (0.5 years) * 100 = 40% (Note: This is not the actual annual return, but an annualized representation of the 6-month gain)

3.    IRR (Internal Rate of Return) for SIPs: The Internal Rate of Return (IRR) is another pivotal method for calculating mutual fund returns, particularly useful for analyzing a series of cash flows — like those in SIPs, but typically used for lump-sum investments. IRR helps in determining the annual growth rate that makes the net present value of all cash flows (both positive and negative) from the investment equal to zero. 

For example, if you make a lump-sum investment in a mutual fund and receive various amounts in returns over different periods, the IRR would be the rate that equates the sum of the present values of these returns to your initial investment amount.

4.    Compounded Annual Growth Rate (CAGR): This is a valuable metric for long-term investments. It reflects the average annual growth rate that would have resulted in the ending value, assuming returns were compounded each year. It's calculated as [(Current NAV / Initial NAV) ^ (1/Number of Years)] - 1 * 100.

For example, if you invested Rs. 10,000 in a mutual fund that grows at a steady 10% annually for 5 years (Current NAV = Rs. 16,105 after 5 years), the CAGR would be:
CAGR = [(Rs. 16,105 / Rs. 10,000) ^ (1/5)] - 1 * 100 = 10.24% (This reflects the average annual growth that generated the ending value).

5.    XIRR (Extended Internal Rate of Return) for SIPs: Systematic Investment Plans (SIPs) involve regular investments over a period, which makes their return calculation slightly more complex. This is where the Extended Internal Rate of Return (XIRR) comes in. 

For example, if you invest Rs. 5,000 monthly in an SIP and the value after one year is Rs. 65,000, the XIRR would be 18.7%, considering Rs. 5,000 investment each month. 

While IRR is like XIRR in concept, it is more commonly applied to a series of regular cash flows, making XIRR a more suitable choice for the irregular cash flows typical in SIP investments. Understanding both IRR and XIRR is beneficial as it adds depth to your ability to evaluate different investment scenarios.

Each of these methods offers a unique perspective on mutual fund performance and understanding them can significantly aid investors in making well-informed decisions about their mutual fund investments.

How Does a Mutual Fund Calculator Work?

Mutual fund calculators work by simplifying complex financial formulas to estimate the potential growth of your investment. They consider several factors to provide you with an idea of your future returns:

•    Investment Type: The calculator can handle both lump sum investments (one-time investment) and SIP (Systematic Investment Plan) contributions.

•    Investment Horizon: You'll specify the total duration of your investment, which factors into the future value calculation.

•    Expected Rate of Return: This is your educated guess on the annual percentage gain your investment will achieve.

The calculator utilizes a specific formula based on your chosen investment type (lump sum or SIP) to determine the future value. This future value represents the estimated total amount your investment will be worth at the end of the investment period.

Here's a simplified breakdown of the process:

•    Input your Investment Details: You'll enter the investment amount, investment period, and expected rate of return.

•    The Calculator Applies the Formula: Based on your chosen investment type (lump sum or SIP), a relevant formula is applied to your input values.

•    Estimated Future Value is Displayed: The calculator presents the estimated total value of your investment at the end of the investment horizon.

Examples:

Lump Sum Investment: 

Let's say you're considering a lump sum investment of Rs. 1 lakh in a mutual fund for a 10-year period. You anticipate an annual return of 8%. A mutual fund calculator would likely use the following future value formula for a lump sum investment:

Future Value (FV) = Present Value (PV) * (1 + r/100)^n

SIP Investment: 

Imagine you plan to invest Rs. 1,000 every month via SIP for 10 years, expecting an 8% annual return. The calculator would employ a formula that considers the compounding effect of regular contributions:

FV = P [(1+i)^n-1] * (1+i)/i

Where:
FV = Future Value (what you want to estimate)
P = SIP investment amount (your monthly Rs. 1,000)
i = Compounded rate of return (monthly equivalent of annual return)
n = Investment duration in months (total months of SIP investment)

How to Use the Shriram AMC Calculator

Our online mutual fund calculator is easy and user-friendly. Here are the steps to use the Shriram AMC calculator:

•    Step 1: Enter the amount you wish to invest per month.
•    Step 2: Input the number of years.
•    Step 3: Finally enter the expected rate of returns and you will see the estimated total returns on your investment.

Advantages of Using a Mutual Fund Calculator

Using a mutual fund calculator offers several advantages for investors, making it a valuable tool for planning and decision-making. Here are the benefits of a mutual fund calculator:

•    Effortless Estimation: Get a reliable idea of your potential returns on mutual fund investments without any manual calculations.

•    Time-Saving Convenience: Access the calculator online anytime, anywhere, making financial planning on the go a breeze.

•    Smarter Investing: Compare different investment strategies (SIP vs. lumpsum) and adjust variables to see how it impacts your returns, empowering you to make informed decisions.

•    Goal Setting Made Easy: Use the estimated future value to set realistic financial goals and align your investment plan with your aspirations.

Things to Consider about Mutual Funds Returns

When delving into mutual fund returns, several crucial factors demand your attention. Here are the details:

•    Focus on years, not months: Don't chase short-term gains. Look at a fund's performance over several years.

•    Compare and contrast: See how the fund stacks up against similar investments to judge its success.

•    Risk-reward balance: Choose a fund with a risk level that aligns with your comfort zone. Lower fees mean more gains for you.

•    Boost returns with reinvestment: Reinvesting dividends can significantly increase your returns.

•    Look for consistency: Choose funds with a history of steady returns, but remember past results aren't guaranteed.

•    Match your goals: Pick a fund that targets your goals, whether growth, income, or a mix of both.

Conclusion

Understanding how to calculate mutual fund returns empowers you to make informed investment decisions. This guide explored various methods like absolute returns, annualized returns, CAGR, and XIRR, each offering valuable insights into a fund's performance. 

Mutual fund calculators simplify these calculations, providing estimates of your future returns. Utilize these tools to plan your investments strategically, considering factors like investment horizon, risk tolerance, and fund consistency. 

Remember, chasing short-term gains isn't wise; focus on long-term performance and align your investments with your financial goals. By employing these strategies, you can navigate the world of mutual funds with confidence.
 

FAQs

Here are some of the commonly asked questions about calculating mutual fund returns:

1.    What tools can I use to calculate returns on my mutual fund investments?

You can use financial calculators, investment apps, or spreadsheet software like Microsoft Excel, which offers functions such as XIRR for calculating SIP returns and other built-in formulas for different types of return calculations.

2.    Is it necessary to calculate mutual fund returns manually?

While manual calculation is possible, it's often more convenient and accurate to use digital tools or consult with financial advisors, like the ones at Shriram AMC, who use specialized software for these calculations.

3.    How often should I calculate the returns on my mutual fund investments?

It's advisable to calculate your returns at least annually or as often as you review your investment portfolio to keep track of performance and make informed decisions.

4.    What basic information do I need to calculate mutual fund returns?

You'll need the initial investment amount, the current value of the investment, and the duration of the investment period to start with most return calculations.

5.    Can I compare the performance of different mutual funds by calculating their returns?

Yes, calculating and comparing the returns of different mutual funds can help you assess their performance and make better investment choices.
 

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