How to Calculate Mutual Fund Returns?

Mutual fund investment is not complicated and can be learned quickly by anyone who wants to grow their investment and participate in market-linked profits. Mutual fund calculator is considered the best guiding tool as it has a top-notch advanced algorithm, which gives the investor accurate results on returns expected on the investment in the particular types of mutual fund and provides other details relating to the investment. The mutual fund calculator can be used by anyone for free from the convenience of their home, anytime. A mutual fund calculator helps in making mutual fund investment decisions easier, as per the financial goal of the investor.

What is Mutual Fund Returns?

Mutual fund returns mean the rate of return in terms of profit or loss you get after investing your money for a specific period. It is used to measure the profitability and performance of the mutual fund, which you can use to compare with mutual funds offered by different companies. The returns are calculated and represented in percentage that shows the current value of your investment while considering factors like an increase in the value and dividend income, etc.

Usually, mutual funds are calculated annually, but you can also calculate for different timeframes, such as daily, weekly, monthly, quarterly, or half-yearly. Based on these returns, you can expect or calculate the future value of the money you invest in such mutual funds.

However, mutual fund returns are influenced by various factors like market conditions, fund managers’ investment strategy, transaction charges, and other expenses. Hence, based on these factors, the mutual fund returns also keep changing, but maintaining the highest and most consistent returns is one of the highest motives of all mutual fund managers.

The returns on mutual funds can be calculated in different ways, or you can say that mutual funds show their returns in different ways. The returns can be calculated as annualized, CAGR, absolute returns, and XIRR, as per the different investment perspectives. To understand these returns better, or how they are calculated, let’s find out different calculation methods of mutual fund returns.

Ways of Calculating Mutual Fund Returns:

Absolute Returns

Absolute returns are a simple and straightforward calculation method that shows the total return on your investment in terms of absolute returns. It is the return you get on your investment, the time horizon is not considered here only the absolute return is shown here. Based on these absolute returns, you can see the total value of your investment.

Absolute Return Formula: (Present Value of Investment – Initial Value of Investment) / Initial Value of Investment x 100

In the mutual fund industry, the value of investment is represented by NAV or net asset value, which represents the price of one unit of the mutual fund. Hence, you have to consider the present value of NAV and the value of NAV at the time of investment.

For example, suppose you have invested Rs 1 lakh in mutual funds with an NAV of Rs 100 per unit. Now, after 3 years, the value of your investment is Rs 1 lakh 30 thousand with an NAV of Rs 130 per unit. Here, when you put the desired values in the formula, you will get an absolute return of 30% on the amount you have invested in the mutual fund.

Annualised Return

Calculating the annual return in a mutual fund is useful when the time period is less than one year. It tells you on an annual basis how you are earning from your investment. A simple annualized return is calculated with the formula given below.

Simple Annualized Return: (1 + Absolute Return) ^ (1 / N) – 1

In this annualized return formula, N is the total number of periods considered for the measurement, and “1” is divided by “N”. To get the rate of return daily, you can also use 365 instead of 1. Considering the values from the previous example, the calculation is:

(1 + 0.30) ^ (1 / 3) – 1 = 9.14%

Here you can see that with a total return of 30% over three years, when annualized, it will become 9.14%. Calculating the annualized return is useful when you want to know the rate of return on your investment for less than one year.

What is a Mutual Fund Calculator?

A mutual fund calculator is an online tool that helps calculate different types of returns on investments. These calculators typically allow you to choose the type of return you wish to calculate, enter the required values, and provide results instantly. Though the interfaces of these calculators may differ, the formulas they use remain consistent.

How to use a Mutual Fund Calculator?

To use a mutual fund calculator, visit a reliable website offering such tools. You will need details like your initial or monthly investment, the total value of your investment, the number of years of investment, and the estimated rate of return.

After gathering the data, select the type of return (absolute, annualized, CAGR, or XIRR) you want to calculate, enter the values, and click calculate to get the results. These online calculators also display detailed breakdowns of your investments and returns.

Compounded Annual Growth Rate (CAGR)

The compounded annual growth rate is the average annual growth rate of your investment. It provides the standardized measurement of interest you earn on your principal amount and your interest income. It shows the standardized measure to compare investment performance and gives you a better view of actual returns on your investment.

CAGR Calculation Formula

(Final Value of Investment / Initial Value of Investment) ^ (1 / n) – 1

(130000/100000) ^ (1/3) – 1 * 100 = 9.14%

Extended Internal Rate of Return (XIRR)

XIRR is a more comprehensive way of calculating the return on your investment, primarily used for systematic investment plans (SIPs). In SIP, a fixed amount of money is invested at regular intervals, like weekly, monthly, quarterly, or yearly. XIRR helps calculate the rate of return on investments made at different periods, considering any withdrawals during that time.

XIRR Calculation Formula

To calculate XIRR on mutual funds, use the Excel sheet and input the necessary values, or use the formula:

(NPV (Cash Flows, r) / Initial Investment) * 100

Conclusion

Calculating mutual fund returns is essential for any investor aiming to accurately measure their investments’ performance and profitability. Understanding absolute returns, annualized returns, CAGR, and XIRR empowers investors to make informed decisions and align their investments with their financial goals. Tools like mutual fund calculators further simplify the process, offering quick, accurate results from the comfort of your home. Whether you are a beginner or an experienced investor, mastering these calculation methods and utilizing online calculators can help you optimize your investment strategy and maximize potential returns over time.