When we look at the Mutual Fund Returns then there is Multiple types of returns are visible in the statement, to make it clear about each type of returns we have explained below. The return on any investment, measured over a given period of time, is simply the sum of its capital appreciation and any income generated divided by the original amount of the investment, which is expressed as a percentage. The term applied to this composite calculation is total return.
For investors, returns are the key indicators of their investment performance. In mutual funds, NAV is the basic element used in calculating the returns because it keeps varying from one point of time to other. Thus, the purchase and sale value of investment is derived by multiplying the units purchased with NAV for respective period i.e. purchase date and sale date.
Returns are often termed in value and % change, for instance, investment of Rs.1,00,000 appreciates to Rs.1,30,000 during the term of 3 years of value. It means that the principal has appreciated by Rs. 30,000, while in terms of percentage change, its 30% appreciation. But, can we term this % change as the only method to gauge the performance of mutual fund investments. So, let’s explore different methods of calculating our investment performance, so, next time we decisively understand the returns on our investments.
The absolute returns are very easy to calculate as it measures the value of investment at one point of time with other. This is the most common method to interpret the investment performance. It is generally used to measure the performance of mutual funds with high equity exposure, who’s NAV (Net Asset Value) fluctuates from time to time.
For Example: If fund is purchased at Rs.10 per unit and after 3 years, if NAV appreciates to Rs. 18 per unit, here the absolute returns is 80% i.e. calculated as follows:
(Sale Value or Current Value – Purchase Value or Historical NAV) x 100
(Purchase Value or Historical Value)
(Rs.18 – Rs.10) x 100
————————– = 80%
Simple Annualized Returns:
The simple annualized return is just an extension to absolute returns. It is an average annual return on investments over the period of time. The simple annualized return is used for those funds, whose NAV is less volatile or fluctuates less frequently. In mutual fund industry, simple annualized returns are used for debt, liquid and short-term funds for a period less than year, as there NAV is less volatile.
For Example: A debt fund is purchased at Rs.10 per unit, after three month NAV appreciates to Rs.10.20.This fund has fetched simple annualized returns of 8.00% i.e. (2.00% x (12/3)) during the period of 3 months.
(Current NAV – Historical NAV) x 100
———————————————— x (365 / No. of Days) or (12/ No. of months) or (1/ No. of years)
(Absolute Returns) x 365
(365/No. of days) or (12/No. of months)
Compounded Annualized Growth Rate (CAGR):
The CAGR rate is used to calculate returns for the period beyond one year for all types of mutual funds (Equity, Debt and Hybrid). The CAGR returns are annualized returns, which consider compounding effect. The CAGR is calculated as follows:
Current Value of Scheme
——————————— (1/no. of years) or (365/ no. of days) – 1
For Example: The fund is purchased at the NAV of Rs.10 per unit after three years NAV rises to Rs.20, then CAGR returns will be 25.99% i.e. ((20/10)^(1/3) -1). The investor will be surprised to see 100% in term absolute returns during last three years or he may simply divide it by 3 to get 33 % per annum, which gives the incorrect picture. The CAGR return actually calculates the growth rate of investment per annum by considering the compounding effect.
With reference to above example, the investment has appreciated by 25.99% every year to take the shape of Rs.20,000 at the end of three years. As this returns are based on difference in two values (purchase & sale / current value), they fail to cover the volatility, which takes place in NAV during the investment horizon.
Extended Internal Rate of Return (XIRR):
The XIRR is a method which considers the time value of money at different period of time. The below table indicates the SIP performance for the period of 12 months.
In the table, the investor invests Rs.1,000 per month for 1 years, in such case the absolute returns won’t be of any use because the money is invested for different period of time The IRR (Internal Rate of Return) considers the time value of money for investment made at different point of time. So, instead of referring absolute returns, it is feasible to use XIRR returns, which is nothing but IRR. In the mentioned illustration, the total amount invested is 12,000, while it rose to Rs. 15000/- is the total return achieved due to appreciation in NAV during the year. The fund has posted 48.62% XIRR returns during the period of one year.
The XIRR is calculated with help of XIRR function available in MS – Excel as in the
3-Jan-12 Rs .15,000
Amount Invested Rs.12,000.
Investment in Mutual Funds is Subject to Market Risk.