How to Calculate Mutual Fund Returns

Learn the steps to accurately calculate mutual fund returns for informed investment decisions.
How to Calculate Mutual Fund Returns
3 mins read
10-Apr-2024

Mutual Funds are a popular investment choice for both beginners and experienced investors alike. They offer benefits such as diversification, professional management and easy accessibility, among others.

However, since mutual funds are market-linked investment options, the returns they generate are dependent on the performance of the market. Therefore, as an investor, you must know how to calculate mutual fund returns. This way, you can better evaluate their performance and make informed investment decisions.

In this article, we are going to look at the different ways of calculating mutual fund returns and a few key things you need to keep in mind when performing mutual fund investment calculations.

What is a mutual fund return?

Mutual fund return is the term used to refer to the profit or loss you earn on your investment over a certain period. Represented in the form of a percentage, it reflects the performance of the fund's underlying assets and is usually adjusted for factors such as mutual fund expenses and dividend distributions.

Different ways of calculating mutual fund returns

The performance of mutual fund investments is dependent on various factors. This includes market conditions, the fund’s underlying assets, its investment strategy and its expense ratio. As an investor, it is important to know how to calculate mutual fund returns since it could potentially help you evaluate the overall profitability of the fund. Here are some of the most common ways of calculating mutual fund returns.

  1. Absolute returns
    Absolute returns represent the total percentage change in the value of your mutual fund investment over a specific period, without considering the time factor. You can use the following formula to determine absolute returns.
    Absolute Returns = (Current Net Asset Value - Initial Net Asset Value) ÷ Initial Net Asset Value x 100
  2. Annualised returns
    Annualised returns measure the average annual rate of return on an investment over a specified time period. Since the method smooths out fluctuations in performance, it is more suitable for calculating mutual fund returns if the holding period exceeds 12 months. You can use the following mutual fund return calculation formula to determine annualised returns.
    Annualised Returns = [(1 + Absolute Returns)(365 ÷ holding period in days)] – 1
  3. Compound Annual Growth Rate (CAGR)
    Compound Annual Growth Rate (CAGR) is one of the most accurate ways to calculate mutual fund returns. It measures the growth of the fund over multiple periods and considers the effect of compounding. CAGR is widely used by investors and fund managers to compare the performance of their fund with that of its peers or the benchmark index. Using the following formula, you can quickly determine the CAGR of a fund.
    CAGR = {[(Current Net Asset Value ÷ Initial Net Asset Value)(1 ÷ holding period in years)] - 1} × 100
  4. Extended Internal Rate of Return (XIRR)
    XIRR is a comprehensive method for calculating mutual fund returns. It takes into account the timing of the various cash inflows and cash outflows to determine the annualised rate of return. This makes the method suitable for determining returns from mutual fund SIP investments. The simplest way to determine the XIRR of a fund is to use the XIRR function in a spreadsheet program such as Microsoft Excel. The function is as follows:
    XIRR (values, dates, (guess))

Here, values represent the various cash inflows or cash outflows, including the redemption amount. Dates represent the various dates on which the inflows and outflows happened, including the redemption date. Guess represents the approximate rate of return you expect the fund to generate. It is optional and can be skipped if you are unsure or do not wish to enter any values.

Things to consider when calculating mutual fund returns

When calculating mutual fund returns, there are a few factors that you need to consider. Accounting for the below-mentioned factors can help you get a more accurate picture of the fund’s performance.

  • Investment objective
  • Investment timeframe
  • Risk profile of the fund
  • Historical performance
  • Expense ratio of the fund
  • Dividend distributions
  • Consistency in returns
  • Performance relative to the benchmark index

What is the ideal mode of investment for better returns in mutual funds?

Although most investors tend to make lump-sum investments, this may not always be the ideal mode of investment. This is due to the impact of short-term market volatility, which can end up lowering mutual fund returns during adverse market movements.

Investing via a Systematic Investment Plan (SIP), on the other hand, is more ideal. It involves investing a fixed amount regularly in a fund at predefined intervals. When done over an extended period, SIPs average out the cost of investment and significantly reduce the impact of market volatility, potentially leading to higher returns.

Conclusion

With this, you must have now mastered the art of calculating mutual fund returns. Before you proceed with the calculations, remember to consider factors such as risk, expense ratio and consistency, among others. If you wish to increase the wealth creation potential of your mutual fund, you could also consider making a SIP investment instead of investing a lump sum.

On the Bajaj Mutual Fund Platform, you can find more than 1,000 mutual fund schemes from some of India’s leading Asset Management Companies (AMCs). You can also compare mutual funds with one another on the basis of different metrics, including their returns, enabling you to easily determine the fund that best suits your requirements.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

What is the formula used to calculate mutual fund returns?
The mutual fund return calculation formula will vary depending on whether you choose the absolute returns, annualised returns, Compound Annual Growth Rate (CAGR) or Extended Internal Rate of Return (XIRR) method of calculating returns.
How do I calculate the returns from a mutual fund scheme?
Returns from a mutual fund scheme can be calculated through either of the following methods - absolute returns, annualised returns, Compound Annual Growth Rate (CAGR) or Extended Internal Rate of Return (XIRR).
How are returns calculated for mutual fund SIP investments?
The best way to calculate returns from mutual fund SIP investments is to use the Extended Internal Rate of Return (XIRR) method.
Can I get a 20 percent return from a mutual fund investment?
Although some mutual fund schemes have produced 20% returns, this is not the norm because mutual fund returns are directly dependent on the performance of the market.
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