Results are the one thing that keeps us going. When we start seeing results – that’s when we get even more consistent. What’s your say? What can we possibly do to start seeing results with our mutual fund investments? First, this is not a one-line answer to get going with. Also, before we get to the part of knowing how to get returns on your mutual fund investments, we have to know everything from the 360 views of these returns. Let’s get started.
What is Mutual Fund Returns?
We know this question seems very basic – but honestly, this is a much-needed question.
Mutual Fund returns, like those of other asset types, are computed by calculating the increase in the value of your investment over time in comparison to the initial investment. Mutual Fund Net Asset Value represents its price and is used to calculate returns on your Mutual Fund investments.
Let’s start understanding the returns from mutual funds.
Understanding Mutual Funds Returns
When looking into the performance of a mutual fund scheme, let us say you are looking into the HDFC mutual fund returns; one should not be led solely by the plan’s return. In the last few years, a plan may have achieved a 10% annualized return. However, the market indices would have risen in a comparable manner during the same time period. Underperformance in a falling market, i.e., when the scheme’s NAV falls more than its benchmark (or the market), is when you should reconsider your investment.
The scheme’s return must be compared to its benchmark return. It is preferable to remove from one’s portfolio any investment in a program that persistently underperforms its benchmark over time.
Over a longer time horizon, it is critical to detect underperformers (as also out-performers).
Furthermore, one should consider examining the ‘category average returns.’ Even if a scheme outperforms its benchmark by a significant margin, the peer group may contain higher performers. The category average returns will demonstrate how good (or poor) an investment is in comparison to its peers, allowing you to decide whether it is time to change your investment to better performers.
One may have an insufficiently or excessively diverse portfolio. Even the expenditure ratio of some schemes that one may own may be considerable when compared to others in the same category. Most importantly, the assessment assists an investor in determining whether the assets match his or her goals.
Methods to Calculate the Mutual Fund Returns
a) Absolute Returns
Absolute returns show how much your mutual fund investment has changed in value at the time of withdrawal or redemption. Assume you invested one lakh in a mutual fund program at the beginning of 2023. Your mutual fund scheme’s value will increase to 1 lakh 25 thousand in January 2023. If you decide to stick with your plan for another three years, the absolute returns on your investment will be calculated as follows:
(Final Investment Value – Initial Investment) * 100 / Initial Investment Equals Absolute Return.
b) CAGR
CAGR, which stands for Compounded Annual Growth Rate, is the third method of determining mutual fund returns. It shows you how much your investment has grown over a specific time period. Furthermore, it considers the interest earned on the interest as well as the interest earned on the interest itself.
CAGR is an important method for calculating investment returns since it takes into account the time value of money. When contrasted to absolute returns, it provides a more true picture of how profitable a mutual fund plan may be as an investment vehicle. Furthermore, CAGR allows you to determine how variable your returns can be over time.
When you continue to invest for a longer period of time by making many installments at unpredictable intervals, CAGR becomes ineffective. As a result, in the circumstances such as SIPs (Systematic Investment Plans), returns are computed using another tool known as XIRR (Extended Internal Rate of Return).
c) Annualized Returns
Annualized returns are the annualized returns earned by a mutual fund. These returns are calculated based on the assumption that your mutual fund plan has grown at a consistent rate, which is not necessarily the case. However, these returns provide an approximation of what you can expect from a year’s worth of investment. The formula for computing annualized returns is as follows:
(Final Investment Amount / Initial Investment Amount) / Annualized Return 1 – (1/number of years)
d) Extended Internal Rate of Return
XIRR is a useful method for estimating mutual funds for SIPs. SIPs, as previously explained, involve investing a specific amount of money in a mutual fund scheme in installments at predetermined intervals of time. If you choose to pay monthly and redeem your money on a specific day, your returns for that SIP will vary based on how long you retain it. Furthermore, when you choose the SIP mode of investment, you buy the MF scheme at its current Net Asset Value (NAV).
When you redeem your investment, you will get a value that is equal to the total units you held multiplied by the net asset value of your fund on the redemption date. In other words, XIRR operates as a sum of numerous CAGRs on each SIP installment you make.
Things You Should Never Leave Out with Mutual Fund Returns
Mutual funds are typically aimed at long-term investors since they provide constant growth while also protecting you from market volatility. In general, mutual funds have the propensity to underperform the market average during a bull market. They can, however, outperform during a weak market.
Long-term investors typically have a lower risk tolerance since they are more concerned with mitigating risk than maximizing returns from a mutual fund scheme.
When discussing mutual fund returns, “excellent” returns are defined as those that meet an investor’s desired level of returns, financial goals, and expectations. As a result – there is no such thing as a one-size-fits-all mutual fund program. Most investors will be content with returns that are consistent with the market’s average.
Simply said, any amount that may achieve your investing goal will yield a satisfactory annual return.
On the other side, if you expect substantially bigger returns, you may be disappointed, particularly if you do not intend to stay invested for the long term.
When calculating mutual fund returns, you must consider economic factors as well as current market performance. Assume the market is in a severe bear market. Stocks are expected to fall by 10-15% over this period, but an MF investor who makes a 4% profit can consider this to be quite profitable.
Conclusion
Before making any investment, consider the many forms of mutual fund returns. It is crucial to note that each type of return is influenced by overall economic conditions and market performance. You may calculate mutual fund returns using a variety of online mutual fund return calculators.