Point to point returns

Point to Point Returns are used by investors to measure returns at different times. It tracks fund performance over specific date-to-date periods. Calculations can use intervals of three, five, or ten years.
EXPLORE FUNDS
What is point to point return?
EXPLORE FUNDS
3 min
17-September-2024
Point to Point Return is a measure used to calculate the performance of an investment over a specific period. It determines the percentage change in the value of an investment from one point in time to another, providing a clear view of how the investment has performed during that interval. This metric is useful for evaluating the overall gain or loss of an investment over a defined period, which can be a day, month, year, or any other time frame.

This article will discuss what is point to point returns mutual funds, its significance in evaluating investment performance, and how it compares to other performance metrics.

What is the return on a mutual fund scheme?

The Return on Investment (ROI) for a mutual fund scheme reflects the yield produced by the investment over a specified time period, expressed as a percentage. To determine this return, various methods can be used:

  • Absolute returns: Measures the total change in value from the initial investment amount.
  • Simple annualised returns: Provides the average annual return over a specified period.
  • CAGR (Compounded Annual Growth Rate): CAGR Calculates the mean annual growth rate of an investment.
  • XIRR (Extended Internal Rate of Return): Used to compute returns from a series of investments (SIP Returns).
These calculations rely on the Net Asset Value (NAV), which is the market value of the mutual fund's securities divided by the total number of units.

What are point to point returns?

Point to Point Returns measure the investment performance between two specific dates, such as one year, three years, or five years. This metric uses historical data to calculate the absolute return over the chosen period. The formula for Absolute Returns is:

Absolute Returns (%) = (Current Value – Principal Investment) / Principal Investment * 100

This calculation requires knowing both the start and end dates of the investment period.

Advantages of calculating point to point returns

  • Specific time period: Provides a clear view of returns for a defined duration.
  • Decision-making: Helps investors assess performance and make informed investment choices.
  • Independence: Evaluates fund performance in isolation, independent of benchmarks.
  • Market adaptability: Adjusts to changes in the equity market.
  • Simplicity: Easy to calculate and understand.

Are point to point returns misleading?

Point to Point Returns can be misleading as they only reflect performance between two specific dates, without accounting for fluctuations in between. If the market was down at the start but improved by the end, returns might seem unusually high. Additionally, long-term Point to Point Returns may ignore important interim developments. Thus, relying solely on this metric might provide an incomplete picture of performance. Rolling returns offer a more comprehensive view by considering performance over various periods.

Difference between point to point returns and rolling returns

AspectPoint to point returnsRolling returns
Calculation methodMeasures returns between two specific datesCalculates returns over multiple overlapping periods
CoverageLimited to a single periodCovers various intervals within the investment horizon
Data considerationOnly start and end datesConsiders all data points within the period
InsightSnapshot of performance at two pointsProvides a more consistent view of returns


Conclusion

Point to Point Returns offer a snapshot of investment performance between two specific dates, making them useful for evaluating returns over a defined period. However, they might not reflect the full picture of an investment's performance due to their focus on just the start and end dates. For a more comprehensive analysis, consider additional metrics such as rolling returns, which provide a broader perspective on investment performance over time.

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Frequently asked questions

What is a point-to-point return?
A Point-to-Point Return measures the investment performance between two specific dates. It calculates the percentage change in value from the start date to the end date of the investment period, providing a snapshot of how much the investment has appreciated or depreciated during that time.

Why are point to point returns important?
Point to Point Returns are important because they provide a clear picture of an investment’s performance over a specific period. They help investors evaluate the return on their investment from a particular start date to an end date, allowing them to assess the growth or decline during that time frame.

What is the difference between point to point return and annualised return?
Point to Point Return measures the total return over a specific period without considering the length of the investment. Annualised Return, on the other hand, adjusts the Point to Point Return to an annual basis, providing a standardised measure of return per year, which is useful for comparing investments of different durations.

Can point to point returns be negative?
Yes, Point to Point Returns can be negative. If the ending value of the investment is lower than the beginning value, the Point to Point Return will reflect a loss, indicating that the investment has depreciated during the specified period.

What are the limitations of point to point returns?
Point to Point Returns have limitations as they only reflect performance between two specific dates and do not account for fluctuations or volatility during the period. They might not provide a comprehensive view of the investment's performance if the start or end dates coincide with market highs or lows.

How do point to point returns differ from rolling returns?
Point to Point Returns measure performance between two fixed dates, while Rolling Returns assess performance over multiple overlapping periods. Rolling Returns provides a more detailed view of an investment’s performance by averaging returns over different time frames, which can offer a better understanding of consistency and volatility.

When should an investor use point to point returns?
Investors should use Point to Point Returns when they want to evaluate the performance of their investments over a specific time frame, such as from the date of purchase to the date of sale or another defined period. It is useful for assessing short-term performance and understanding gains or losses during that particular period.

How do market conditions impact point to point returns?
Market conditions can significantly impact Point to Point Returns. If the market experiences significant volatility or a major shift between the start and end dates, the returns can be skewed. For instance, if an investment starts just before a market downturn and ends during a recovery, the Point to Point Return might reflect misleadingly high returns.

Can point to point returns be used for all types of investments?
Point to Point Returns can be used for various types of investments, including mutual funds, stocks, and bonds. However, their effectiveness depends on the nature of the investment and the investment period. For investments with frequent price fluctuations, Point to Point Returns might not capture the full picture of performance.

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