You worked hard to save yet rising inflation gradually reduces the value of your money each year. Your fixed deposits or savings account can’t keep up and dreams like buying a home or funding education are uncertain. This is where mutual funds come in. The big question is: What is the return on mutual funds? Knowing this helps you understand actual growth, compare funds and plan investments that beat inflation. This blog explains mutual fund returns, types and calculation methods in detail.
What Is the Return on Mutual Funds? (Meaning & Basics)
Return on mutual funds is the profit or loss on an investment in a given timeframe, represented as a percentage and calculated using different components. It covers both the rise in fund value and the dividends received. These returns are commonly calculated annually but can also be assessed over shorter or longer timeframes. They provide a way to compare fund performance across companies, though outcomes vary with market conditions, fund management style, expenses, and other influencing factors.
Types of Mutual Fund Returns
To learn what is the return on mutual funds, first learning about the different types of mutual fund returns is important, such as:
- Absolute Return in Mutual Funds
An absolute return mutual fund shows the total growth of your investment without considering the time period. It is calculated as:
Absolute Return = (Present Value of Investment – Initial Value of Investment) ÷ Initial Value of Investment × 100
In mutual funds, this is based on the change in NAV (Net Asset Value), which represents the unit price of the fund.
- Annualised Return (CAGR) in Mutual Funds
CAGR, or Compound Annual Growth Rate, reflects the average yearly growth of an investment while accounting for compounding. The formula is:
CAGR = (Final Investment Value ÷ Initial Investment Value) ^ (1 ÷ n) – 1
where (n) is the number of years the investment is held. This measure smooths out growth over multiple years.
- Total Return Including Dividends & NAV
Total return is considered the most accurate way to measure a mutual fund’s performance over a period, as it shows the actual gain or loss. It combines the change in NAV (Net Asset Value) with any distributions such as dividends or capital gains. Since NAV decreases when distributions are paid, relying on NAV alone can misrepresent performance. Total return adds these distributions back to present a complete picture of profitability. The formula is:
Total Return = (Ending NAV – Beginning NAV + Distributions) ÷ Beginning NAV
Net Return vs Gross Return: Role of Expenses & Taxes
Mutual fund performance can be measured in two ways, as follows:
Gross return shows the total income a fund generates before deductions. Net return reflects the actual return an investor receives after accounting for costs and taxes. Since expenses and taxation directly reduce investor earnings, understanding the distinction is important for evaluating performance. Here’s how they differ:
| Aspect | Gross return | Net return |
| Definition | Total return before deductions | Actual return after expenses and taxes |
| Includes expenses | No | Yes (expense ratio, admin, management costs) |
| Includes taxes | No | Yes (STCG, LTCG, dividends, where applicable) |
| Source of impact | Raw portfolio performance only | Impacted by costs and tax obligations |
| Investment evaluation | Indicates how the fund’s investments perform | Shows what investors truly earn |
| Typical magnitude | Always higher or equal to net return | Always lower or equal to gross return |
Average Mutual Fund Returns in India & Globally
Mutual fund returns vary across markets and fund categories. International mutual funds delivered up to 20% average return over the past year, supported by U.S. tech rallies, global market gains, and rupee depreciation. As on 26 August, 2025, here’s how the average mutual fund returns looked like in India:
| Category | 1 year average return (%) | 3 year average return (%) | 5 year average return (%) |
| Small cap funds | -4.59% | 24.37% | 28.00% |
| Infrastructure sector funds | -7.47% | 24.22% | 28.50% |
| Healthcare sector funds | 3.06% | 24.08% | 18.47% |
| Precious metal funds (Commod.) | 36.55% | 23.76% | 13.22% |
| Flexi cap funds | -2.23% | 17.21% | 19.91% |
| Large cap funds | -1.82% | 14.85% | 18.18% |
| Aggressive allocation funds | 0.38% | 15.22% | 17.51% |
| Medium duration funds | 7.90% | 7.52% | 7.09% |
| Liquid funds | 6.29% | 6.40% | 5.22% |
Factors That Affect Mutual Fund Returns
Various aspects influence the performance of a mutual fund. These elements are connected and may impact returns in the short as well as long term.
- Fund manager’s expertise: A skilled manager can make well-researched investment choices, balancing opportunities and risks. Poor decisions, however, can drag performance below expectations.
- Investment strategy: A fund’s stated objective whether growth-focused, value-oriented, or income-generating directly shapes the kind of securities it holds and the returns it may achieve.
- Asset allocation: The mix of equity, debt, and other holdings in a portfolio is essential. Greater equity allocation usually indicates higher potential for growth, while debt provides steadiness.
- Market conditions: Broader economic indicators, corporate earnings, interest rates, and global trends play a large role in determining how securities within the portfolio perform.
- Expense ratio: Mutual funds charge a fee that covers administrative and fund management expenses. A higher expense ratio lowers net returns, making cost efficiency an important factor.
- Portfolio turnover: Frequent buying and selling of securities can increase transaction costs. While sometimes necessary, high turnover often reduces overall profitability.
- Inflation: Even if nominal returns appear strong, high inflation reduces the real value of those gains, lowering the investor’s actual purchasing power.
- Regulatory and taxation impact: Changes in government policies, tax structures, or compliance rules can influence returns by altering costs or after-tax earnings.
Mutual Fund Returns vs Benchmark
When evaluating a mutual fund’s performance, comparing its returns to a benchmark index is essential. A benchmark acts as a reference point, usually a market index like Nifty 50, Sensex, or S&P 500, depending on the fund’s category. It reflects the performance of the overall market or a specific sector. When a mutual fund regularly beats its benchmark, it shows capable management and good investment selection. This excess return over the benchmark is called alpha, and it shows the value added by the fund manager. On the other hand, if a fund underperforms the benchmark, it suggests the fund is not delivering results better than a simple passive investment option like an index fund or ETF.
For example, if the Nifty 50 index delivers 10% annual returns and an equity mutual fund generates 12%, the fund has outperformed by 2%. However, if it delivers 8%, it has underperformed by 2%.
Benchmark comparison helps investors identify whether a fund is worth its costs and risks. Without this yardstick, raw return figures may look attractive but offer little meaning. Ultimately, the benchmark ensures performance is judged in context rather than in isolation.
How to Calculate Mutual Fund Returns (Step-by-Step)
Calculating mutual fund returns is important to understand how much an investment has grown over time. The process is as follows:
Step 1: Determine initial investment
Identify the amount originally invested in the mutual fund. Take ₹50,000 investment as an example
Step 2: Find the current value
Check the present worth of your investment by multiplying units held with the current NAV or referring to your fund statement. Let’s say: Current value = ₹65,000.
Step 3: Calculate the gain or loss
Subtract the initial investment from the current value. Gain = ₹65,000 – ₹50,000 = ₹15,000.
Step 4: Apply the formula
Use the following formula to find the percentage return:
Absolute Return % = (Current Value – Initial Investment) ÷ Initial Investment × 100
Using the formula in the example:
= (65,000 – 50,000) ÷ 50,000 × 100
= 15,000 ÷ 50,000 × 100
= 30% absolute return
Step 5: Use CAGR for longer timeframes
For investments held over multiple years, Compounded Annual Growth Rate (CAGR) gives a clearer picture of annualised growth by smoothing out fluctuations across the holding period.
Step 6: Account for dividends
If dividends are reinvested, the growth option NAV should be used in the calculation, as it reflects both capital appreciation and reinvested income.
Interpreting Returns with Risk
Mutual fund performance should be viewed alongside the level of risk taken, as follows:
- Alpha: Alpha measures a fund’s return relative to its benchmark after adjusting for risk. Positive alpha signals that the fund earned above-benchmark returns, while negative alpha shows weaker performance. For instance, an alpha of +1.5 implies the fund exceeded its benchmark by 1.5%.
- Beta: Beta demonstrates how responsive a fund’s returns are to movements in the market. A beta value of 1 suggests the fund typically mirrors the movements of the market index. A beta above 1 indicates higher responsiveness, meaning the fund may rise more in bullish markets but also fall more in downturns. A beta below 1 points to lower sensitivity, showing that the fund is relatively more stable.
- Sharpe Ratio: The Sharpe ratio measures a fund’s extra return above the risk-free rate in relation to the risk undertaken, calculated as standard deviation. A higher sharpe ratio suggests the fund provides more return beyond the risk-free rate relative to the risk, calculated using standard deviation. Lower values indicate weaker compensation for the risks borne by investors. It allows investors to compare funds that yield similar returns but involve varying degrees of risk.
Conclusion
Knowing what is the return on mutual funds is key to growing your wealth strategically. Returns show how efficiently your money works after expenses and risks are considered. Keeping an eye on performance, refining allocations, and making thoughtful decisions ensures your investments not only grow but also stay aligned with your long-term financial objectives.
FAQs
A good return on Indian mutual funds is generally considered around twelve to fifteen percent annually for equity funds over the long term, outperforming inflation and benchmark indices. Debt funds are expected to deliver six to eight percent, balancing risk and steady income. Returns depend on fund type and market cycles.
To calculate mutual fund returns online, use mutual fund return calculators available on financial websites or fund house portals. Enter the investment amount, purchase date, and redemption or current date. The calculator uses NAV data to compute returns, often showing both absolute returns and CAGR for performance details.
Absolute return is the total percentage gain or loss on an investment over a period. CAGR (Compound Annual Growth Rate) smooths returns, showing the annualised rate of growth as if the investment grew steadily each year, useful for comparing different timeframes or funds.
Expense ratios reduce the fund’s returns as they cover management fees and operational costs. Higher expense ratios eat into profits and can significantly impact compounded returns over time, making it important to consider this factor while selecting funds.
No, mutual funds do not guarantee fixed returns. Returns depend on market performance, fund type, and investment strategy. Equity funds are volatile, while debt funds are relatively stable but still subject to credit and interest rate risks.
In India, the average 5-year annualised return for equity mutual funds typically ranges between ten to and fourteen percent, while the 10-year average is around twelve to fifteen percent. Debt funds offer lower averages, approximately six to eight percent annually over these periods, reflecting more stable but modest growth.
High-risk equity funds like small-cap, mid-cap, and sector-specific funds (technology, pharma) often provide the highest returns but with higher volatility. Balanced or large-cap funds offer moderate returns with lower risk. Past performance is no guarantee of future results.
