How Are Returns Calculated in Mutual Funds When Investing in A Lump Sum Amount?

The returns in mutual funds are dependent on the prevailing market conditions. Whether you choose to invest lumpsum in debt or equity mutual funds, you will get returns based on the risk factor. Equities provide high returns than debt mutual funds. With financial planning and expert assistance, you can set return expectations.You must know that mutual fund returns are calculated by computing appreciation in the value of an investment over a period against the initial investment made. In short, it is the difference between the selling price and buying price.

1. Absolute Returns: Also known as point-to-point returns, where the increase or decrease in the fund price is indicated by a percentage. These types of returns are calculated for mutual funds having a tenure of less than one year. For instance, if the investment value is Rs.4,00,000 and the amount you invest is Rs. 2,50,000. The calculation would be: [(4, 00,000-2, 50,000)/2, 50,000] = 60%.
2. Annualised Returns: As the name suggests, the returns of the value of the investment is measured on an annual basis. For instance, if you invest Rs.1,00,000 in a scheme. In three years' time, the value of the investment has increased to Rs.1.4 lakh. This means the annualized return is 11.9% due to the compounding effect.
3. Rolling Returns: This represents the annualized returns from a scheme over a period of time. The returns can be daily, weekly, or monthly. Compound Annual Growth Rate is used to estimate the returns of mutual funds with a holding period of more than a year. This reduces the short-term fluctuations and volatility of NAV.

Here's how the CAGR is calculated: CAGR = [(Current Net Asset Value / Beginning Net Asset Value) ^ (1/number of years)]-1When you're involved in a one-time investment, compounding is the best method to estimate returns. Let's understand this with a tabular representation:Assuming you invest Rs.15 lakhs for ten years at an average rate of return of 15%. So, the compounding annual returns would be calculated:(1.15)^10*15,00,000 = Rs. 60.68 lakhs

Tabular representation of the returns in a mutual fund on a yearly basis:

When calculating returns in mutual funds manually, there are chances of human error. Using a mutual fund returns calculator online is an easy way to understand how much yields you can generate from a scheme.Whether you're investing in lumpsum or using SIP mode, you can use an online calculator by filling in simple details like name of the fund, plan/scheme, to and from date, and then click on calculate. You can get to know approximate returns from the scheme or plan.

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.