It’s all about the numbers. As an active investor, you might have invested in multiple mutual fund schemes over the years. However, when wealth creation is your ultimate goal, there are some numbers you just cannot ignore.
Why? Because not all mutual funds generate the same returns. And to ensure you’re parking your funds in the right place, you need to review the performance of these schemes regularly to determine the underperformers and outperformers.
While investors often depend on financial advisors or tools to estimate the return on their investment, different ways of calculating returns can present a different picture. Here we will talk about the six different types of mutual fund returns that you should know about.
Annualised returns or Compounded Annual Growth Rate (CAGR) measures the growth of investment value in a year by considering the effect of the compounding rate of interest. Annualised returns are useful for comparing different mutual funds with varying tenures.
Annualised returns = (Current NAV value/Purchase NAV) 1/n – 1
where n=holding period in years
Absolute return refers to the increase or decrease in the investment measured as a percentage, irrespective of the investment tenure. These returns are usually calculated for mutual funds with a tenure of less than a year and are fairly easy to calculate. If the tenure exceeds a year, you will have to calculate annualised returns.
Absolute returns = [(Selling Price-Cost Price)/Cost Price] x 100
Trailing returns are the annualised returns over a specific trailing period ending today. Trailing returns are relevant if you wish to assess the past performance of your funds. Such returns are calculated from a particular date of the recent year to any past date for 1/3/5/10 years.
Trailing returns = (Current NAV/NAV at the beginning of the trailing period) 1/n – 1
where n= trailing period
Point to point returns
It is the annualised return generated by a mutual funds scheme between two points in time. For instance, if you want to understand how a mutual fund performed during a specific period, say, between 2018 and 2021, you will have to calculate the point-to-point returns.
To assess point-to-point returns of a mutual fund scheme, all you need to do is determine the NAV of the funds at the start and end dates and calculate the annualised returns.
Point to Point Return = [(NAV at the end date – NAV at the start date)/NAV at the start date] x 100
The total returns are the actual returns earned from the mutual fund investment, including the dividends, capital gains, and interest over the period. Total returns are useful to gauge a mutual fund’s performance, helping you make a better investment decision.
For instance, suppose you are looking to invest in either of two companies, A and B, which have the same growth percentage in a year. But company A has already paid a portion as a dividend to its investors. In this case, the total returns will be greater for company A. Thus, it reflects a better performance than company B.
Total Returns = [(Capital Gains + Dividend)/ Total Investment] x 100
Rolling returns are the annualised returns over a specific period – daily, weekly, or monthly – measuring the scheme’s absolute and relative performance at regular intervals. Rolling returns are significant in evaluating a fund’s performance because it reflects how a fund’s performance has improved consistently, and not just over the latest period.
Since it offers an unbiased analysis, rolling returns are widely accepted as the most reliable measure of a fund’s performance.
To sum up
Since mutual funds are a long-term investment, it is crucial to assess and compare the expected returns before investing. With a better understanding of various types of returns, you’d be in a better position to analyse the performance of different mutual funds.
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