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Mutual Fund Returns

Absolute Returns: Absolute returns are the returns garnered by a mutual fund over a certain period. It is the percentage increase in your investments at the end of a specific period. For example: If you have invested Rs 10000 in a fund and at the end of three years your fund value stands at Rs 15000, your absolute return in this case is 50%. Absolute Return is a very static measure and doesn’t reveal much about the fund performance in the light of various factors.

Relative Returns: Relative Return is the difference between the Absolute Return and the benchmark returns. Benchmark such as BSE Sensex, CNX Nifty, BSE IT Index, BSE Midcap, BSE Small Cap etc. are considered in such cases. Relative Return is a crucial parameter because it measures the performance of an actively managed fund in relation to the benchmark indices. Ideally, your returns on a mutual fund should exceed the benchmark returns in an actively managed fund wherein you are payment Management Expenses. However, in an index fund, the relative return doesn’t matter much.

Total Returns: This refers to the actual return that you have gained on your investment. It includes the actual returns as well as the capital gains and dividend. Let us take an example. If you have purchased 2000 units of a mutual fund with NAV Rs 20, your actual investment is Rs 40000. If the NAV increases to Rs 22, your total investment increases to Rs 44000. Hence the absolute returns on the fund is 10%. Now, if the fund also declares dividend at Rs 2 per unit, the total dividend will be Rs 4000. Hence, the investment increases to Rs 48000 (Rs 44000+Rs 4000) and your total return becomes 20%.

Annualised Returns: Absolute returns give you how much the funds have increased over a period, while annualised returns measure how much the fund has gained yearly. This is also known as the Compounded Annual Growth Rate and considers the time value of Money. For example, if your funds valued Rs 1 lakh increase upto Rs 1.4 lakhs over three years, your absolute return may be 40%, but your annualised return will be 11.8%.

Trailing Returns: It is the annualised return over a trailing period which ends on a date, say today. For instance, if the NAV of a MF scheme today is Rs.100, let’s say, and three years ago it was Rs.80. The formula to calculate trailing return will be (Current NAV / NAV at the beginning of the trailing period) ^ (1/Trailing Period) – 1. In a nutshell, it is the returns of as on period.

Point to Point returns: Point to Point returns are the returns that is earned by a fund between two time periods. This shows the returns earned by investors between two point in time and how exactly the fund has performed during the period. This method has flexibility which means that you can select any period that you wish to know the fund’s performance about.

Rolling returns: They refer to a scheme’s annualised returns over a particular period, say daily, weekly or monthly, ending with the listed year. This is also known as rolling period returns or Rolling time periods. One of the main objectives of Rolling returns is to highlight the frequency and quantum of an investment’s strong and weak performance phases. The Rolling return also helps an investor or Fund Manager to assess the fund’s performance over different periods of time.

Determinants of Mutual Fund returns

There are few factors that impact the Mutual Fund returns. Few of them are:

Performance of underlying assets: The performance of underlying assets has a direct bearing on the performance of the Mutual Funds. If the equity markets are on a bull run, the equity-focussed mutual funds would naturally give better returns. Similarly, when interest rate rises, and government bond yields rise, the risk-free return also increases for investors of debt funds. Therefore, the determinants of the performance on debt funds will have a direct bearing on the Mutual Funds return.

Risk: Usually it has been seen that more the returns from a mutual fund, the riskier it will be. The risk element of the mutual funds is directly related to its underlying assets. Volatility, Uncertainty and risk are part and parcel of equity investing and investors have to be exposed to it to an extent. These risky securities also have better return giving abilities on most occasions.

Degree of diversification: The mutual Funds are a mix of asset classes, hence the overall performance of these asset classes will determine the returns of the funds. If the funds are focussed only on a single sector, the economic factors and sectoral performance will determine the returns, on the other hand if the fund has international securities then the global economic health, dollar performance and the price of crude will impact it. Hence, the degree of diversification plays a great role in determining the returns.

Expenses: The return on Mutual Funds is a net of the investment returns minus the fund management fees. Every mutual fund charges fees for management, documentation, marketing, distribution and miscellaneous other back-office expenses. Most of the mutual funds have expense ratio of 2% to 3%. Hence, the returns of Mutual Funds are pressurized by the expense ratio of the fund. The more it is, the less is the net return.

Macro-economic factors: This is one of the most powerful factors impacting the returns of the Mutual Fund. No fund functions in isolation. It is a pool of assets which play a role in the economy. Any change in the economic scenario of the country, it has direct impact of the return that the Mutual Fund will generate. If key sectors like the banking, manufacturing and technology are under pressure because of internal or external factors, then the returns of the mutual funds are expected to be impacted.

Rate of inflation: Many investors overlook inflation as a factor while calculating the real returns. Real returns are nothing but inflation-adjusted returns. For eg, if your mutual fund gives you a return of 10% and the rate of inflation is 4%, then the real returns will be 6%. This is more applicable to short-term funds than long-term fund because in the long-run the returns on equity negates the effect of inflation.

Regulatory changes: Mutual Funds like other investment vehicles is subject to strict regulation. Any kind of changes in the regulatory environment has direct or indirect bearing on the returns of the funds. For e.g.: Recent changes like Rationalization and Categorization of the Mutual Fund schemes is one such big move. This regulation has reportedly resulted in many Asset Management companies to register their portfolios or merge the schemes. Big overhauls like this are sure to impact the returns for investors.

Mutual Fund returns calculator

The easiest way to know your Mutual Funds return is through a Returns calculator. The Returns Calculator provides you an answer by calculating fund returns for the chosen period. Apart from Annualised and Absolute Returns, the calculator also helps you to see the performance rank of the fund within its peer group for different time frames. You can see the returns over a period of 1 week, 1 month, 3 Months, 6 months, 1 year, 2 years, 3 years, and 5 years.

How can you invest in Mutual Funds through SIP?

Offline Mode

An investor can invest a fixed amount in a scheme monthly or quarterly, based on his convenience through post-dated cheques or through ECS (auto-debit) facility. All you need to do is to fill up an Application form and SIP mandate form. The date for SIP debit needs to be mentioned on the form. The forms and cancelled cheques can be submitted to the office of the Mutual Fund / Investor Service Centre or nearest service centre of the Registrar & Transfer Agent. The amount is invested at the closing Net Asset Value (NAV) of the date of realisation of the cheque.

Online mode

There are several platforms which allow you to invest in SIPs and reap returns through Mutual Funds. You can even opt for SIPs through bank portals online. You need to choose the mutual fund of your choice, fill in the required details and the preferred SIP mode and enjoy the rewards of Mutual Funds.

Frequently asked Questions

(1) What are the various annualised mutual Fund returns?

Annualised returns measure how much the fund has gained yearly. This is also known as the Compounded Annual Growth Rate and takes into account the time value of Money.

(2) How does riskiness impact Mutual Fund returns?

The risk element of the mutual funds is directly related to its underlying assets. These risky securities also have better return giving abilities on most occasions.

(3) What is a Mutual Fund return calculator?

Mutual Fund return calculator is an online tool available on various portals wherein you can check your annualised, absolute and relative returns over a chosen period ranging from 1 week to 5 years.

(4) What is the ideal duration for checking the Mutual Fund returns for evaluation?

The ideal duration for checking the mutual fund evaluation is every six months to a year based on the tenure of the investment.

(5) Do Mutual Fund expenses impact the returns?

The return on Mutual Funds is a net of the investment returns minus the fund management fees. The more the expense ratio, the less is the net return.

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