Mutual funds are gradually becoming a popular investment option in India because of their many benefits. Mutual fund returns are considered to be usually higher, however, they are subject to market risks. Returns from a mutual fund depend on the type of assets it invests in as well as its market movements and general economic conditions. Investors can calculate the potential returns that a scheme can generate to get an idea about their earnings.
This blog discusses different types of mutual fund returns, their calculation and other details. Read on!
There are several methods of calculating the average rate of returns on a mutual fund. Some of these are as follows:
In absolute or point-to-point returns, gains are calculated between the starting date and the redemption date of funds. You should use this value when the holding period is less than a year.
Annualised returns help to calculate the rate of return over the entire investment period, irrespective of whether it is shorter or longer than a year. It shows a much-smoothened rate as it considers the compounding effect of interest rate.
This refers to a fund’s annualised returns for a certain period, which can be daily, weekly or monthly. To know the rolling returns, you have to measure the fund’s absolute and relative returns over blocks of 3, 5 or 10-year periods.
The total returns refer to the actual gains that you got from your investment. It includes both the capital gains from the mutual fund and dividend income.
In this method, you calculate the returns from historical data over a specific trailing period, for example, 1 year, 3 years, and so on. You can calculate this in an MS Excel spreadsheet using the XIRR (Extended Internal Rate of Return) function.
Point-to-point return is defined as mutual fund returns between two different time periods. To calculate point-to-point returns, you need to take into account the start date and end date of the investment and the fund’s Net Asset Value (NAV) for these two dates. You can calculate it using the formula for absolute returns.
Mutual funds do not provide any guarantee of generating particular amounts as returns, as their performance depends on the market. Moreover, mutual fund investments are associated with different types of risks, based on which they can be classified. The different types of mutual funds based on risks are:
Generally, equity mutual funds and equity-oriented funds are considered high-risk funds. These funds are ideal investment options for people who have a high risk-taking capacity. High-risk funds also hold the potential to generate inflation-adjusted returns. Investors receive maximum returns if they remain invested for a long tenure. Sub-categories of high-risk funds include mid cap funds, large and mid cap funds and small cap funds.
These mutual funds generate lower returns than high-risk funds, but they are also associated with lower risks. It is an ideal investment option for people who have slightly lower risk appetites, as the portfolios contain moderate exposure to equities. Examples of moderate-risk funds include dynamic asset allocation funds and credit-risk funds.
Low-risk funds are mutual funds that have minimal or zero exposure to equities. These schemes are ideal investment options for people who are completely averse to risks and do not want any exposure to market volatility. When compared to other categories, mutual funds belonging to this category generate the lowest returns. Examples of these funds include money market funds, liquid funds, low-duration funds and conservative hybrid funds.
Calculating mutual fund returns is a good idea as it will provide you with an idea about how much you have earned from your investments. The formula for manually calculating the returns from a fund is as follows:
M = P (1 + r/100)^n
While you can always calculate returns manually, it is time-consuming and prone to mathematical errors. Using a mutual funds return calculator is a convenient option.
Follow to the steps below to get an estimate of your mutual funds’ return:
You will receive the result instantly. This online financial tool is simple and easy to use with a user-friendly design. It helps save valuable time and plan your financial management.
Expected return rate (p.a)
Time Period (Years)
Here are some of the factors that have a significant impact on the average returns of mutual funds:
Macroeconomic factors like government policy, geopolitical events, etc., have a significant impact on a mutual fund’s returns. For example, a favourable government policy in a sector could see the stock prices soaring.
The fund manager and his/her team of experts are responsible for managing investors’ money and finding suitable investment options. Their research and fund selection has a significant impact on a fund’s performance.
All fund houses charge an expense ratio that contains all the fees related to operating a mutual fund. A higher expense ratio can cut into your returns, especially in the case of long-term investments.
Since a mutual fund collects money to invest, more investment would result in more cash for portfolio diversification. However, if many investors exit their investments, the fund manager will have to sell a large part of the holdings, which would negatively impact the NAV of mutual funds.
Calculating the mutual fund returns tell you how much gains the scheme accrued over time. Returns over the short term do not accurately reflect a fund’s performance. Thus, you should look at a fund’s long-term returns and compare them against its benchmark and competitors. However, it is important to remember that a fund’s past performance is not an indicator of its future returns.
A fund with a high AUM has more cash flow, and thus, it should perform better than smaller funds. However, if a fund’s corpus becomes too large, the fund manager might not be able to manage the funds efficiently.
Alpha is a parameter that tells you the fund manager’s contribution. It measures a fund’s performance as a result of stock selection. It is by calculated by subtracting the actual returns from the expected returns while taking into account its beta (measure of a fund’s volatility relative to its benchmark index).
The risk-adjusted return of a mutual fund is given by its Sharpe ratio, which signifies a fund’s returns against its risks. Mutual funds generating high returns with low risks associated are the most sought-after among investors.
Yes, capital gains from mutual funds are subject to taxes, depending on the holding period of investment. In the case of equity-oriented funds, for a holding period of 12 months or more, long-term capital gains (LTCG) are taxed at 10%. Short-term capital gains (STCG) tax is applicable at a 15% rate for a holding period of less than 1 year.
For other types of mutual funds, STCG tax is applicable for a holding period of fewer than 36 months at the relevant tax slab rates. Lon term capital gains are taxed at 20% with the indexation benefit.
The exit load is a charge applicable if you sell your fund units within a particular period. Most fund houses charge an exit load if you redeem your funds before a year. In India, fund houses can only charge an expense ratio and an exit load but not an entry load.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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