May 29, 2013 9:23 am
Returns in Mutual Fund can be calculated in many ways
Suppose you invested in the growth option of a mutual fund scheme in 5 Janu 2005 at a NAV of 12. Now, if the NAV were to rise to 32 on the exit day, say, 27 May 2013,
Point to point returns: These returns are calculated by considering the NAVs at two points in time-entry date and exit date. using point-to-point returns you’ll find that your fund has generated an absolute return of 166.67% (32-12/12 *100)
compounded annual growth rate (CAGR)CAGR is the year-over-year growth rate of an investment over a specified period of time. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate.
Calculated as (ending-value/beginning value)^(1/number of years)-1 * 100 which in above case will come out to be 13.06%
Though CAGR can be calculated for any time period, a simple point-to-point return is preferred when the holding period is less than one year and CAGR is ideal for longer holding periods.
For information on different kind of returns you can checkout Understanding Returns: Absolute return, CAGR, IRR etc
Absolute returns only make mathematical sense and not financial sense. CAGR is the only proper way to calculate returns. For durations less than a month CAGR can be converted to a monthly IRR (not dividing by 12!)
It is not a smart idea to compute returns for less than a year anyway. It has no utility except instill false sense of relief and hope.
SIP are more tougher and need iterative processes to compute. Here is a simple calculator for both types
Dear Nishant, the difference in NAV from your investment date to the current date or to the redemption date ‘ll be your return from the MF.
Kindly explain how the returns will be compounded in MF investments ?
As the value of my investment will depend on the NAV on current date.
For e.g. Rs. 10K invested in a particular MF will grow or reduce based on the NAV of the fund on that date. So how long term investment will affect it? Unlike in PPF where the amount you invest in a year will be added to the total and the interest will be compounded on that total and so on. How the returns will be annualized in MF investments?
Thanks & regards.
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