Mutual Fund Returns - Know Types and How to Calculate MF Returns

Here’s what you need to know about mutual fund returns, so you can keep a better eye on your investments.
Mutual Fund returns
4 mins
08 January 2024

Investing in mutual funds has become a popular choice for many Indians looking for ways to grow their wealth. One of the key factors that investors consider when choosing a mutual fund is its returns. This article will explain what mutual fund returns are, the different types of returns, how to calculate them, and the factors that can affect them.
Understanding mutual fund returns involves knowing that they are the gains or losses made from an investment over a specific period. These returns are often reported as percentages and serve as an important measure of the fund’s performance. Mutual fund returns can be complex and confusing, but they are crucial in assessing the success of your investment.

Types of mutual fund returns

  1. Absolute returns: This is how much your investment grows in percentage, no matter how long you’ve invested. For instance, if you put Rs. 2,00,000 into a mutual fund and it grows to Rs. 2.5 lakhs in 4 years, your absolute return is 25%.
  2. Annualised returns: This is the return you get each year. It takes into account the effect of compounding interest.
  3. Total returns: This is the overall gain from a mutual fund, including any interest, dividend, distributions, and increase in value over time.
  4. Point to Point returns: This is the annual return recorded between two specific points in time. You just need the start date and the end date of a mutual fund scheme to calculate this.
  5. Compounded Annual Growth Rate: This is the annual return over a specific period that ends today. The formula to calculate trailing return is similar to point-to-point returns but uses today’s NAV and NAV at the start of the trailing period.
  6. Annual return: This is simply the return earned from a scheme between January 1st and December 31st of a particular year.

How to calculate mutual fund returns

Each type of mutual fund return comes with its own formula, as follows:

  1. Absolute returns: This is how much your investment has grown in total. The formula is:
    Absolute return = {(Final investment value – Initial investment value)/Initial investment amount}*100
  2. Annualised returns: This is the return you get each year, assuming your investment grows steadily. The formula is:
    Annualised return = ((1 + Absolute Rate of Return) ^ (365/no. of days)) – 1
  3. Total Returns: This is the total gain from a mutual fund, including any interest, dividends, and increase in value. The formula is:
    Total returns = {(Capital gains + Dividends)/Total investment}∗100
  4. Point-to-point returns: This is the yearly return between two specific dates. You need the start and end dates of a mutual fund scheme to calculate this.
  5. Trailing returns: This is the yearly return over a period that ends today. It uses today’s NAV (Net Asset Value) and NAV at the start of the period. CAGR = {[(Present NAV / Initial NAV) ^ (1 / number of years)] −1} × 100
  6. Annual return: This is the return earned between January 1st and December 31st of the year.

Factors affecting mutual fund returns

Here’s a simpler explanation of what can change mutual fund returns in India:

  1. Performance of securities: A mutual fund invests money in securities like debt and equities. How these securities perform can really change the fund’s returns.
  2. Fund manager’s performance: The choices and plans of the fund manager can have a big effect on how the fund does. A good manager can handle tricky situations and keep investors’ money safe.
  3. Economic changes: Changes in government policy can really affect different parts of the economy. If a mutual fund is heavily invested in one sector, a good trend will help the fund make more money.
  4. Size of the fund: bigger the fund may have better returns. But the size of the fund does not have greater impact on the return.
  5. Cash flow: Money moving into and out of a mutual fund can change its performance.
  6. Market/ sector/ industry changes: Changes in markets, sectors, or industries can affect how your mutual fund does.
  7. Total Expense Ratio (TER): The TER, which includes all the costs that a fund incurs , may impact the returns.

To sum up, knowing about mutual fund returns helps you see if your investment is doing well and decide where to invest your money. Keep in mind, while higher returns sound great, they also mean more risk. So, when picking a mutual fund, think about how much risk you can handle and what you want to achieve with your investment.

Things to Consider about Mutual Funds Returns

When analysing the returns of mutual funds, several crucial factors merit attention:

  1. Timeframe: Take into account the period for which returns are assessed. Short-term returns may exhibit greater volatility, while long-term returns offer a more comprehensive view of the fund's performance.
  2. Benchmark Comparison: Compare the fund's returns against a relevant benchmark index representing similar investments. This comparison aids in determining whether the fund is surpassing or lagging behind its peers.
  3. Risk-Adjusted Returns: Evaluate the risk-adjusted returns of the fund. Some funds may yield higher returns but come with increased risk. Understanding the correlation between risk and returns is vital for gauging the fund's suitability based on your investment objectives and risk tolerance.
  4. Expense Ratio: Factor in the expense ratio of the mutual fund, reflecting the annual fees and expenses charged. Higher expense ratios can diminish overall returns and impact long-term performance.
  5. Dividends and Distributions: Consider any dividends or distributions received from the mutual fund, as they significantly contribute to overall returns and influence the fund's tax efficiency.
  6. Consistency: Seek consistent returns across various timeframes. A fund with a steady track record demonstrates stability and may prove more reliable than one with sporadic performance.
  7. Past Performance: While past performance doesn't guarantee future results, it offers insights into the fund manager's ability to generate returns. Examine the historical performance, mindful that future results can be shaped by evolving market conditions.
  8. Investment Objective: Evaluate whether the mutual fund's investment objective aligns with your financial goals and risk tolerance. Different funds cater to diverse objectives, such as growth, income, or a combination thereof.

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Frequently asked questions

How often are mutual fund returns distributed to investors?

Investors usually get mutual fund returns as dividends or capital gains. All funds need to give out their collected dividends at least once a year. Only investors who have opted for dividend plan will get dividend subject to availability of distributable surplus.

Are there any tax implications associated with mutual fund returns?

Yes, there are tax implications associated with mutual fund returns. Profits gained from investment in mutual funds are known as ‘Capital gains’. These capital gains are subject to tax. The taxation rules differ based on the type of mutual fund, such as equity mutual fund, debt mutual fund, hybrid mutual fund, etc. Dividends and capital gains are taxable in the hands of investors of mutual funds. The capital gains are taxed separately based on the holding period and the type of fund. The holding period influences the tax rate payable on your capital gains. The higher your holding period, the lesser tax you are liable to pay.

What is the average return on a mutual fund?

The average return on a mutual fund varies and depends on market conditions and the fund's investment strategy. It is crucial to review historical performance and consider factors like risk before investing.

Is a 10% return on a mutual fund good?

A 10% return on a mutual fund can be considered good, especially if it aligns with the investor's financial goals and risk tolerance. However, individual expectations and market conditions play a significant role in determining what is considered satisfactory.

What is the average ten-year return on mutual funds in India?

The average ten-year return on mutual funds in India varies across different funds and categories. Investors should assess the historical performance of specific funds they are interested in and consider their investment objectives.

Are mutual fund returns taxable?

Yes, mutual fund returns are taxable. Gains from equity-oriented funds held for over one year are subject to Long-Term Capital Gains (LTCG) tax, while gains from debt funds held for over three years attract LTCG tax. Short-term gains are taxed as per the investor's income tax slab.

Are mutual funds tax free?

While there is no specific tax-free amount for mutual fund returns, certain investments like Equity-Linked Savings Schemes (ELSS) offer tax benefits under Section 80C. Investors should consider tax implications based on the fund type and holding period.

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