Calculations of returns on Mutual Funds - How to Calculate MF Returns?

Mutual fund returns are determined dependent on the NAV movement.

Net Asset Value movement

For instance, if the fund NAV today is 25 and following 1 year, the fund NAV gets 30. At that point the fund has given (30-25)/25 = 20% return.

Presently this NAV movement would rely on the underlying securities in the portfolio. For instance, equity mutual funds would have stocks in the portfolio. Inside the equity mutual fund category, large-cap mutual funds will have a significant portion of top 100 stocks in India, mid cap mutual funds would have a significant designation of top 101-250 stocks in India and the small-cap mutual fund would have a significant allotment of top 251-500 stocks.

Moreover, debt mutual funds would have bonds in the portfolio. These bonds are given by both government and corporate houses.

If it's not too much trouble note that the NAV movement of equity mutual fund is more unstable in nature when contrasted with the debt funds. The explanation is the movement in the stock price of the underlying organizations in the portfolio.

In the above model, suppose the market fall because of any explanation then the stock price would likewise fall. This would diminish the NAV of the fund. In the event that the fund NAV tumble from 30 to 27 and on the off chance that you had invested in the mutual fund at the NAV of 30 then your return would be (27–30)/30= - 10% That would be a negative return.

(Also Read: Best Mutual funds to invest in 2021)

Yet, in the event that you invested at NAV of 30 and the fund NAV increments to 33, at that point you will have a profit of 10%.

If it's not too much trouble note that there 2 different ways to ascertain the mutual fund return: Point to point return and rolling return.

Point to point return depends on the most recent NAV. For instance, suppose you invested in a mutual fund at a NAV of 80 and the most recent NAV of the fund becomes 85, at that point your return would be 6.25%. However, the following day if the NAV becomes 84 your return would tumble to 5%. As a rule, you will see the point to point return. In any case, it isn't the correct method to analyze the mutual fund performance.

Rolling return is an approach to ascertain returns dependent on numerous data points. For instance, the 1-year rolling return is determined by taking the NAV contrast on every day with same-day on the earlier year.

For instance, first April 2016 NAV would be contrasted and first April 2015 NAV, second April 2016 NAV would be contrasted and second April 2015 and moreover. Thusly, you get numerous data points. At that point you need to take the average return. This is a superior method to check the return as there is no recency inclination in rolling return.

The main issue is the rolling return count is unwieldy as it requires the NAV of mutual funds for every day. At that point it would depend on the off chance that you need to compute the rolling return for a time of 1 year, 2 years, 3 years or 5 years. As the duration builds, you will require more data points.

If it's not too much trouble note that the NAV price of the mutual fund is determined subsequent to deducting the expense ratio of the mutual fund house and agent (in case of the regular plan). Clearly, the returns from the regular plan would be lower than the direct plan.

What is CAGR (Compounded Annual Growth Rate)?

CAGR shows growth of a particular investment for a certain time period. It considers interest earned on the principal as well as compound interest. CAGR also includes the value of money which increases its importance. 

Calculation of Returns on SIP of Mutual Funds

Systematic investment plan indicates investment of small amounts on regular basis. When a person invests through SIP, he/she buys a unit of mutual fund scheme based on its Net Asset Value on that particular day. When a person redeems his investment, he gets an amount equal to the number of units he has multiplied by the net asset value of the mutual fund on the day of redemption.

Let us understand the calculation of SIP with the help of an example:

Suppose, an investor named Shyam makes an investment of Rs 1000 monthly for 5 months. Hence, the total amount invested will be Rs 5000. At the end of 5 months he will get an amount equal to Rs 5500.

(Also Read: Equity linked saving scheme(ELSS))