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A mutual fund is a financial vehicle where a pool of money is collected from the investors to invest in bonds, money market instruments, stocks and other assets. Depending on the investment objectives and type of returns and securities, a mutual fund can belong to several categories.
Keep reading to know what are mutual fund returns and their types.
Mutual fund returns are those returns that depend on the performance of the fund. Individuals can calculate it by evaluating the change in final investment value from the initial investment value over a particular period.
There are many types of mutual fund returns. Some of which are –
Let us take the example of Mr Ravi, who invested ₹ 1.5 lakhs in a mutual fund scheme. The present value of the invested amount is ₹ 2.5 lakhs. You can calculate the absolute return for Mr Ravi using the following formula –
Absolute Return = ((Final Investment Value – Initial Investment Value) / Initial Investment Value) * 100.
|
Particulars |
Amount |
|
Final Investment Value |
₹2,50,000 |
|
Initial Investment Value |
₹1,50,000 |
|
Absolute Return |
66.66% |
Annualised Returns – It is the amount by which the invested money has grown per annum.
One can calculate this type of mutual fund return using the following formula –
Annualized Return = ((1+ Absolute Return) ^ (365/ number of days)) – 1
OR
Annualized Return = ((1+ Absolute Return) ^ (365/ number of years)) – 1
Compound Annual Growth Rate – Compound Annual Growth Rate, abbreviated as CAGR, is the rate of return by which the investment should grow from the initial investment value to its maturity value.
CAGR is computable using the following formula –
Compound Annual Growth Rate = ((Final Value/ Initial Value) ^ (1/ number of years)) – 1
Let us understand this with the help of an example –
Mr Ram invested ₹10,000 in a mutual fund scheme, and the final value is ₹14,000 over 2 years.
|
Particular |
Amount |
|
Final Value |
₹14,000 |
|
Initial Value |
₹10,000 |
|
number of years |
2 |
|
CAGR |
18.32% |
Trailing Returns – Trailing returns are the type of mutual fund returns that show the performance of a mutual fund over a specific period.
Individuals can calculate trailing returns can using this formula –
Trailing Returns = (Current Net Asset Value / Net Asset Value at the beginning of the trailing period) ^ (1/ Trailing Period) – 1
The table below shows the key benefits of different mutual fund returns in India.
|
Type of Mutual Fund Returns |
Benefits |
|
Absolute Returns |
Diversification of relative return funds portfolio. Lower risks because of the diversified structure. Generates positive returns. Adjustable with the movements of equity market.Independent of market indexes or benchmarks. |
|
Annualised Returns |
Gives a preview of the performance of investment. Due to compounding, it provides a clearer idea about the worth of investment. |
|
Compound Annual Growth Rate |
Compares a variety of investments over a similar investment perspective. Remains unchanged with the percentage changes in the investment horizon. Fixes the limitations of arithmetic average returns. |
|
Trailing Returns |
Provides a clearer picture of the mutual fund scheme's performance than absolute returns. Historical data is taken into consideration for a block of period. |
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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