How the Average Returns on Mutual Funds are Calculated

Mutual Fund investments are popular among individuals planning for financial growth over time. However, one must clearly understand how to calculate the average returns on Mutual Funds to assess their profitability and performance. Calculating average returns provides an idea about the fund’s growth and performance over a specific period. Accordingly, you can make informed decisions regarding your future investment strategy. In the following section, you will learn how to calculate the average returns on Mutual Funds.

How Can a Mutual Fund Return Calculator Online Help You?

Using a mutual fund return calculator can be very helpful when you want to quickly estimate how much return you could earn over time. By using this tool, you can get fast projections for 1-year, 3-year, or 5-year investments based on your input.

The tool is also very easy to use. You are required to enter the amount, duration, and expected return rate in order to get the estimate instantly. You also get to compare various plans and set realistic financial goals. Use this tool smartly and plan for retirement, education, or wealth creation, hence getting a clear view of potential mutual fund returns.

How Does a Mutual Fund Total Return Calculator Work?

The working of a mutual fund total return calculator is simple; you can estimate your earnings from either a lump sum or a monthly SIP investment. For SIPs, it considers changing NAVs each month and calculates how many units you can buy and the total returns based on that.

For one-time investments, it uses the fixed amount, expected annual return rate, and investment duration to give the final return value. You just need to enter basic details like the amount, time period, and return rate. The calculator then quickly shows how your money could grow, helping you plan smarter without doing complex calculations. 

Methods to Calculate Average Returns for Mutual Funds

Different ways to calculate the average returns on Mutual Funds include Absolute return, CAGR (Compounded Annual Growth Rate), XIRR (Extended Internal Rate Of Return), Annualised return, etc. Here’s a look at them:

1. Absolute Return

Absolute return indicates an investment’s upward or downward movement in percentage. Only the initial and current NAV (Net Asset Value) of a fund are needed for calculation. This method of calculating Mutual Fund returns is used for funds invested up to a period of one year.

The formula for calculating Absolute return is:

Absolute Return = {(Present NAV – Initial NAV) / Initial NAV} × 100

For instance, if the initial NAV was 25 and the current NAV is 30, the absolute return will be 20% for an investment period of 9 months.

2. Annualised Return

The investor must use the Simple Annualised Return (SAR) to calculate the annual return for a full year. However, the formula to calculate SAR requires calculating the absolute return first. The formula to calculate Annualised return is:

SAR = [(1 + Absolute Return) ^ (365/t)] – 1

Where,

Absolute Return: This is the total return that an investment has achieved over a specific period. It is calculated as:
Absolute Return = {(Present NAV – Initial NAV) / Initial NAV} × 100

t: The number of days for which the investment was held

365/t: Annualise the return by scaling it to a period of 365 days (one year). If the investment was held for fewer days or more days, this factor adjusts the return accordingly.

Taking the absolute return as 20%, over a period of 9 months, SAR will be

SAR = [(1 + 20%) ^ (365/270)] – 1 = 27.95%

3. CAGR (Compounded Annual Growth Rate)

One must calculate the Compounded Annual Growth Rate to determine an investment’s average annual growth rate. It is a standard measure to evaluate a Mutual Fund’s performance over a period, covering multiple years.

The formula to calculate CAGR is:

CAGR = [{(Present NAV / Initial NAV) ^ (1 / Number of years)}- 1] × 100

For instance, an investor invests ₹1 lakh in a Mutual Fund in 2017 with an initial NAV of ₹20 and after 5 years in 2022, the NAV increases to ₹70.

CAGR = {[(70 / 20) ^ (1 / 5)] - 1} × 100

CAGR = 37.97%

4. XIRR (Extended Internal Rate of Return)

XIRR is an advanced method of calculating the average returns on Mutual Funds based on the cash flow and timing. The final calculation depends on the initial investment, subsequent investment and withdrawals.

SIP (Systematic Investment Plan) returns can be challenging to calculate due to changing investment durations and amounts. Therefore, traditional calculation methods may not be successful. Excel is an appropriate tool to calculate internal returns, considering multiple cash flows. Calculating SIP returns through XIRR requires the SIP amount, redemption date, amount and dates of SIP payments.

The XIRR formula is:

XIRR = XIRR (Values, Dates, Guess)

Steps involved in the calculation:

• Create a table with two columns - SIP dates in one column and corresponding amounts in another
• Enter the redemption dates and amounts in the last row
• Use the Excel XIRR function
• Enter the SIP values in the ‘value’ column and respective dates in the ‘date’ column
• Skip or leave the ‘Guess’ parameter empty
• Multiply it by 100 or format the result as a percentage to obtain the XIRR.

Factors Affecting Mutual Fund Returns

• Performance of the securities: Since Mutual Funds invest money in securities like equities and debt, the actual returns depend on the performance of these securities.
• Performance of the Fund Manager: The fund manager’s plans and choices significantly affect the fund’s performance. An efficient fund manager can make decisions to handle market conditions and keep the investments safe.
• Economic Changes: Changes in the Government and economic policies significantly affect the performance of the Mutual Fund. Mutual Funds which have heavily invested in a single sector experience the maximum impact of such changes.
• Fund Size: The bigger the fund size, the higher the returns.
• Cash Flow: Money flowing in and out of a Mutual Fund impacts its performance.
• Changes in the Market, Sector or Industry: Changes in these spaces affect the performance of a Mutual Fund.
• Total Expense Ratio (TER): It includes the costs of a fund and impacts the returns. The higher the TER, the lower the returns.

Using these calculation methods, investors can make informed decisions when selecting funds as per their risk tolerance and investment objectives. One may also use an online Mutual Fund Calculator to calculate the returns and make informed decisions. Conducting thorough research and consulting a financial advisor is advisable. Remember, calculating the returns accurately is essential to analyse the Mutual Fund's performance.

What is the Average Return of Mutual Funds?

The average return on mutual funds depends on the type of fund:

• Equity mutual funds often offer 9–12% annual returns over the long term, but they carry higher risk.

• Bond funds, which are more stable, usually yield around 3–5% yearly.

• Balanced or hybrid funds, which invest in both stocks and bonds, offer moderate risk and return around 5–8%.

• Index funds, which track market indices like the Nifty or Sensex, usually return 5–8%, depending on market performance.

• Sector funds, which focus on specific industries like tech or pharma, can offer high returns but are more volatile.

Comparison between different approaches

Here’s an overview of the comparison between all three approaches.

How to use SIP Calculators?

1. Choose the investment duration

Decide how long you want to invest.

2. Enter the expected Rate of Return

Provide an estimate of the return rate you anticipate.

3. Calculate

Click on the ‘Calculate’ button to check your projected returns.

Utilising SIP calculators can assist in comparing Mutual Funds and selecting the one that suits your financial objectives best.

Conclusion

While calculating SIP returns may appear complex, understanding the methods can simplify the process. Absolute Return, CAGR, and XIRR each have their uses and advantages. Absolute Return is suitable for short-term investments, CAGR works well for long-term lump-sum investments and XIRR is particularly useful for SIPs.

Online SIP calculators further streamline this process by providing a user-friendly method to accurately estimate your returns. Ultimately, making investment decisions requires an understanding of how returns are computed and using it to your advantage to achieve your financial goals.

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