Average Returns of various mutual fund types:
Equity funds
- Historically average around 9% to 12% annually.
- Subject to market volatility but offer potential for higher returns.
- Can include subcategories like large-cap, mid-cap, and small-cap funds.
Bond funds
- Tend to offer lower returns compared to equity funds, averaging between 3% to 5% annually.
- Provide more stability and lower risk than equity funds.
- Include categories such as government bonds, corporate bonds, and municipal bonds.
Balanced funds
- Blend of equity and bond investments.
- Typically offer average returns between 5% to 8% annually.
- Aim to provide a balance between growth and stability.
Index funds
- Designed to mirror the performance of a specific market index.
- Average returns align closely with the performance of the underlying index, typically ranging from 5% to 8% annually.
- Tend to have lower fees compared to actively managed funds.
Sector funds
- Focused on specific sectors of the economy, such as technology, healthcare, or energy.
- Returns can vary significantly based on the performance of the targeted sector, ranging from negative to high double-digit percentages annually.
- Generally, considered higher risk due to concentration in a particular industry.
Mutual fund category returns - Average from last 3 years
Data as on - 15-10-2024
Category
|
Average Return (%)
|
Equity: Thematic-PSU
|
33.22
|
Equity: Sectoral-Infrastructure
|
28.73
|
Equity: Thematic-Transportation
|
26.00
|
Equity: Thematic-Manufacturing
|
23.44
|
Equity: Small Cap
|
22.67
|
Equity: Contra
|
22.07
|
Equity: Mid Cap
|
21.47
|
Equity: Dividend Yield
|
20.39
|
Equity: Value
|
19.62
|
Equity: Thematic-Consumption
|
19.55
|
Equity: Multi Cap
|
19.48
|
Equity: Sectoral-Pharma and Healthcare
|
19.45
|
Equity: Large and Mid Cap
|
17.86
|
Equity: Thematic-Others
|
17.76
|
Equity: Thematic-Quantitative
|
16.79
|
Equity: Thematic-Energy
|
16.65
|
Equity: ELSS
|
16.30
|
Equity: Flexi Cap
|
15.84
|
Equity: Focused
|
15.42
|
Fund of Funds-Domestic-Equity
|
15.15
|
Fund of Funds-Domestic-Gold
|
15.14
|
Equity: Sectoral-FMCG
|
14.93
|
Hybrid: Multi Asset Allocation
|
14.55
|
Index Fund
|
13.96
|
ETFs
|
13.94
|
Types of mutual fund returns
Here are a few unique types of mutual fund returns:
- Absolute returns: This is how much your investment grows in percentage, no matter how long you have 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%.
- Annualised returns: This is the return you get each year. It takes into account the effect of compounding interest.
- Total returns: This is the overall gain from a mutual fund, including any interest, dividend, distributions, and increase in value over time.
- 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.
- 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.
- Annual return: This is simply the return earned from a scheme between January 1st and December 31st of a particular year.
- Trailing return: It denotes the annualized return over a specific trailing period, concluding today. For instance, if a mutual fund scheme's NAV today stands at Rs.100, and it was Rs.60 three years ago, the formula for calculating the trailing return in Microsoft Excel would be (Today's NAV / NAV at the beginning of the trailing period) ^ (1/Trailing Period) - 1. Hence, the three-year trailing return would amount to 18.6%. Similarly, if the scheme's NAV five years ago was Rs.50, the five-year trailing return would be 14.9%.Read more about the difference between trailing and rolling returns in mutual funds.
- Rolling returns: It represent a mutual fund scheme's annualised returns over a defined period, such as daily, weekly, or monthly. These returns are compared with the scheme's benchmark or fund category until the conclusion of the designated duration. Benchmarks could include Nifty, CNX - Midcap, CNX - 500, BSE - 200, BSE - Midcap, while fund categories might encompass midcap funds, large cap funds, balanced funds, diversified equity funds, among others.
- Compound Annual Growth Rate (CAGR): It serves as a method for computing returns from mutual fund investments held for more than a year. This approach mitigates short-term fluctuations and volatility in the Net Asset Value (NAV) of the funds. The CAGR calculation assumes a steady pace of investment growth. To manually calculate the Compound Annual Growth Rate (CAGR), the equation is as follows:
CAGR = [(Current Net Asset Value / Beginning Net Asset Value) ^ (1/number of years)] - 1
How to calculate mutual fund returns
Each type of mutual fund return comes with its own formula, as follows:
- 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
- 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
- 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
- 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.
- 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
- Annual return: This is the return earned between January 1st and December 31st of the year.
How to calculate your mutual fund returns online?
You can easily assess your mutual fund earnings using an online mutual fund returns calculator. This tool helps estimate how much return you’ve earned on your invested capital.
To use it, simply enter a few key details—such as the mutual fund name, scheme or plan, and the date range for which you want to calculate the returns. Once submitted, click on “Calculate”.
The calculator will display both annualised and absolute returns for the selected duration, which typically ranges from 1 week to up to 5 years.
In many cases, these tools also indicate how your chosen fund ranks in terms of performance when compared to similar funds within its category.
Note: A GST of 18% is applicable on all financial services from 1 July 2017 onwards.
Importance of return rates in mutual funds
Return rates play a vital role in mutual fund investments, as they indicate the potential gains or losses over a defined period. Assessing return rates is essential for analysing a fund’s performance and making well-informed investment choices. Understanding these rates helps investors align their investments with financial goals and risk tolerance.
Evaluating mutual fund return rates
When analysing mutual fund return rates, consider the following key aspects:
- Risk-adjusted returns: A fund’s returns should be evaluated in relation to the risks involved. Higher returns often come with greater risk. Metrics like the Sharpe ratio or Sortino ratio help assess performance after accounting for risk.
- Consistency of returns: A fund that delivers steady, moderate gains over time may be preferable to one with highly volatile returns. Evaluating return stability is crucial for long-term financial planning.
- Fund’s objective: The performance of a mutual fund should align with its stated investment goal. For instance, an income-focused fund may yield lower returns than a capital appreciation fund. Ensure the fund's objective matches your risk tolerance and financial goals.
- Benchmark comparison: Comparing a mutual fund’s returns with its benchmark provides insight into how well it has performed relative to peers and the broader market. This helps gauge whether the fund is outperforming or underperforming.
- Long-term performance: Mutual funds are designed for long-term investment. Evaluating returns over extended periods and across different market cycles offers a clearer picture of a fund’s true potential, rather than relying on short-term fluctuations.
Factors affecting mutual fund returns
Here’s a simpler explanation of what can change mutual fund returns in India:
- 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.
- 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.
- 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.
- Size of the fund: It may seem like the bigger the fund the better the returns. However, the size of the fund does not have a greater impact on the return.
- Cash flow: Money moving into and out of a mutual fund can change its performance.
- Market/ sector/ industry changes: Changes in markets, sectors, or industries can affect how your mutual fund does.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Investment Objective: Evaluate whether the mutual fund's investment objective aligns with your financial goals and risk tolerance. Different mutual funds cater to diverse objectives, such as growth, income, or a combination thereof.
Risks associated with mutual fund return rates
While mutual funds have the potential to generate returns, they also carry inherent risks that investors should consider:
- Market risk: Mutual fund returns are influenced by market fluctuations. Economic downturns, financial instability, and geopolitical events can lead to volatility, affecting the fund’s performance.
- Credit risk: Funds that invest in fixed-income securities, such as bonds, are exposed to the risk of issuer default. If a bond issuer fails to meet its obligations, the fund’s returns may be adversely impacted.
- Management risk: A mutual fund’s performance depends on the expertise of its fund manager. Ineffective investment strategies or poor risk management decisions can negatively affect returns.
- Liquidity risk: Some mutual funds invest in securities with low market liquidity. During periods of financial stress, selling such assets at fair prices may be challenging, potentially impacting the fund’s returns.
Conclusion
Mutual funds offer a compelling way to participate in the stock market and potentially grow your wealth over time. By understanding the various types of mutual funds, their risk-return profiles, and how to invest through a SIP (Systematic Investment Plan), you can harness the power of these investment vehicles to achieve your financial goals. Remember, thorough research, discipline, and a long-term perspective are key to success in mutual fund investing. Consider consulting a financial advisor for personalised guidance tailored to your specific needs and risk tolerance. With careful planning and the right investment strategy, mutual funds can be a valuable tool on your path to financial security.
Essential tools for all mutual fund investors