Mutual Funds: A Take on Different Types of Returns

While mutual funds are an ideal instrument to generate wealth in the long run, it is important to note that not all of them generate the same returns. 

It is essential to review the performance of mutual funds on an occasional basis to analyse whether there are no underperformers in the portfolio. 

Mutual funds are mostly managed by professional asset management companies (AMCs) or fund houses, yet as an investor, it is important to keep an eye on mutual fund returns and get a fair idea about their earnings. 

Here’s the lowdown on six types of mutual funds returns:

Annualised returns: Also referred to as compound annual growth rate (CAGR), it measures the growth in the value of an investment in a year. For this, it takes into account the effect of the compounding rate of interest. It is useful for comparing different mutual funds having varying tenures. 

The formula for the calculation of annualised returns: 

• (current NAV value/ purchase NAV value )1/n -1

n=holding period in years

Absolute returns: It highlights the increase or decrease in investment without considering the investment tenure. It is used for calculating returns for mutual funds with a tenure of less than a year. If the tenure is more than a year, then an investor will have to calculate annualised returns. 

The formula for the calculation of absolute returns:

• [(current sale value-purchase value)/purchase value] x 100

Trailing returns: The returns in this method is calculated between two dates. Rather than calculating the return on the investment at the point when it is sold, tailing returns considers the extent to which it has risen or fallen since then. 

The formula for the calculation of trailing returns:

• (current NAV/starting NAV)^ (1/number of years)-1

Point-to-point returns: The annual return that a mutual fund scheme generates between two points in time is stated to be point-to-point returns. To find out the point-to-point returns of a mutual fund scheme, an investor is required to determine the net asset value (NAV) at the start and end dates and calculate annualised returns. 

The formula for the calculaton of point-to-point returns:

• [(NAV at the end date-NAV at the start date)/ NAV at the start date]x100

Total returns: These are the total returns that an investor earns through investment in a mutual fund scheme, including dividends, capital gains, and interest over time. The performance of a mutual fund can be suitably gauged from total returns. 

The formula for calculation of total returns:

• [(capital gains+dividends)/ total investments]x100

Rolling returns: Also referred to as rolling period returns or rolling time periods, these are annualised returns for a particular period, which could be daily, weekly or monthly while measuring a mutual fund scheme’s absolute and relative at regular intervals. CAGR is used to calculate the returns from mutual funds investment which has a holding period of more than a year. 

Considering that mutual funds are long-term investments, it is essential for an investor to assess and compare the returns before parking money in a particular scheme. A thorough understanding of the various types of returns can be quite handy in gaining insight into the performance of different mutual fund schemes.