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Mutual funds are professionally managed by experts responsible for allocating assets to generate capital gains or profits for their investors. The amount of return generated is dependent on the mutual fund's performance. Different types of returns are often considered while assessing a mutual fund. Let’s understand the different types of returns in mutual funds and their significance:
1. Absolute Returns:
The absolute return refers to the investment growth achieved in terms of percentage irrespective of the investment tenure. The growth is expressed in absolute terms and not in relative or comparative terms.
| The absolute returns are generally used while calculating mutual fund returns for a tenure of less than a year. |
For Example, You invested a sum of Rs 200000 in a mutual fund that grew to 2.5 lakhs in 4 years. The absolute return here will be 25% ((50000/200000)*100). Even if the mutual fund delivers this return of 50000 in 3 years or 5 years, the absolute return will remain 25%.
2. Annualized Returns:
Annualized return refers to the return received by the investor annually. Annualized return or CAGR(Compounded Annual Growth Rate) also considers the effect of the compounded interest rate.
| Annualized returns are useful in cases where you wish to compare different mutual funds with different tenures. It gives a better picture of different mutual funds even when they traded for different periods. |
The annualized return can be calculated using the formula:CAGR = ((Current NAV value/Purchase NAV value) ^ (1/number of years)) – 1]*100For Example, If the purchase NAV value of your mutual fund was Rs 10 and the current NAV value after 2 years is 15, the CAGR value will be computed as below:CAGR = [((15/10)^(1/2))-1] * 100 = 22.4%
3. Total Returns:
The total return of a mutual fund refers to the fund's overall gain, including any interest, dividend, distributions, and capital appreciation over a period. It may sometimes happen that two companies A and B, deliver the same growth percentage in a year. However, company A has additionally paid out a portion as a dividend for its investors. In such a case, company A is showcasing a better performance when compared with company B.
| It is a significant measure to gauge a mutual fund's performance since it reflects the bigger picture and not just captures the price changes. |
The total returns can be calculated as below:Total Returns = [(Capital Gains+dividend)/total investment] * 100For Example, let's assume that you invested Rs 10000 by buying 200 shares of Rs 50 each. After a year, the NAV stands at Rs 55 per share, and you also receive a dividend of Rs 10 per share. The total returns, in this case, will be calculated as below:Total Returns = [ [(55-50)*200 + (10 * 200)]/10000] * 100 = ((1000+2000)/10000) * 100 = 30%
4. Point to Point Returns:
The annual return generated by a mutual fund between two points in time is referred to as point-to-point returns.For Example, the NAV on 1stJan 2020 was Rs 50, whereas, on 31stDec 2020, it was Rs 55. The point-to-point return for the year will be:P2P return = [(55-50)/50] * 100 = 10%
5. Trailing Returns:
Trailing returns are the returns generated over a specific period ending today. It is calculated using the formula:Trailing Returns = (Current NAV/NAV at the start of the trailing period) ^ (1/Trailing Period) – 1For Example, if today's NAV is Rs 50, which was Rs 30 two years back, the trailing return for the last 2 years will be as follows:Trailing Returns = (50/30) ^ (1/2) – 1 = (1.66)^0.5 – 1 = 28.8%
6. Rolling Returns:
Rolling returns are annualized returns over a period, which may be daily, weekly or monthly until the last day of the duration. It serves as an effective measure for analyzing a mutual fund's performance since it is not biased for any specific period and provides a clearer picture to an investor. The CAGR (compound annual growth rate) formula (as in Annualized returns) is used to calculate rolling returns for investments exceeding one year. It is assumed that growth is steadily moving forward.It is crucial to analyse and compare different mutual funds before investment, to improve the chances of profitability. As it is said that numbers may sometimes be misleading, it is essential to understand the concept behind these numbers. With a better understanding of different types of returns, you can effectively measure various funds' performance before picking the right one for yourself.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
