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# Invest smart: Understanding and calculating mutual fund returns

Mutual fund investments can be a great way to build your wealth, but how can you make sure you’re getting the most out of them?

In India, where the investment landscape is thriving, it’s essential to have a solid understanding of how to calculate mutual fund returns accurately. This article aims to unveil the secrets behind calculating mutual fund returns in India and provide you with the insights you need to make informed investment decisions.

## Understanding mutual funds and their returns

Understanding mutual funds and how they produce returns is a prerequisite to delving into the intricacies of calculating mutual fund returns.

Mutual funds are pooled investment vehicles that pool the money of many investors in order to purchase a diversified portfolio of assets such as stocks, bonds, and other investments. If the value of the assets that make up a mutual fund goes up, then the return will go up as well.

Mutual fund returns can be classified into two main categories: income and capital gains.

Income returns are made possible when the fund receives distributions from its investments, such as dividends or interest. Contrarily, capital gains returns are generated when the value of the fund’s investments rises over time.

## Return from mutual fund formula

There are several types of returns that investors can calculate for mutual funds. Here are a few of the most popular ones:

Absolute returns

The total return that a mutual fund has made since it was first established is called its absolute return. It is expressed as a percentage and is determined by deducting the original investment value from the current value.

When it comes to mutual fund returns, this is the simplest method. The formula is:

Absolute returns = (Current Value – Initial Investment Value)Initial Investment Value100

The absolute return, for example, would be the following if you invested ₹10,000 in a mutual fund and its value is now ₹12,000:

Absolute returns = (₹12,000 – ₹10,000)₹10,000100 = 20%

This means your investment has grown by 20%.

Annualised returns

Annualised returns help investors understand the average annual mutual fund return rate generated over a specific mutual fund time period. To compare the efficiency of funds with varied investment horizons, it is a helpful tool.

The investment period exceeding one year necessitates the application of this formula. It gives the average amount of money earned by the investment each year over a given period. The formula is:

Annualised returns = (1+Absolute Return)(1Number of Years) – 1

For example, if the absolute return over 3 years is 20%, the annualised return would be:

Annualised returns = (1+20%)(13) – 1 = 6.26%

This means your investment has grown by an average of 6.26% per year.

CAGR

The mutual fund’s annual return rate at which an investment would have grown if compounded at a constant rate over a given time period is represented by the compound annual growth rate (CAGR). It makes long-term growth look more realistic by reducing return volatility.

The average yearly return on investment for a time frame greater than a year can be determined using this formula. The formula is:

CAGR = (Ending ValueBeginning Value)(1Number of years) – 1

For example, if you invested ₹10,000 in a mutual fund and after 3 years your investment is worth ₹12,000, the CAGR would be:

CAGR = (₹12,000₹10,000)(13) – 1

This means your investment has grown by an average of 6.32% per year, compounded annually.

These formulas are fundamental in understanding how mutual fund returns work in India.

For calculating SIP returns, Excel can be a handy tool, and there are numerous online tutorials available on how to calculate SIP returns using Excel.

Remember, the key to successful investing is understanding how your investments are performing and making informed decisions based on that information.

## Common mistakes to avoid when calculating mutual fund returns

It is critical to be cognizant of typical errors that might result in erroneous calculations when determining mutual fund returns. Listed below are some actions that are not recommended:

Ignoring reinvested dividends: It is essential to factor in the effect of reinvested dividends when computing returns. Ignoring the possibility of reinvesting dividends might lead to erroneous calculations, as doing so can substantially increase total returns.

Not accounting for expenses: Returns on investment (ROI) should take into account all expenses incurred by the mutual fund, including management fees and transaction costs. The return figures can be inflated if these expenses are ignored.

Inconsistent periods: Consistency in the periods being analysed is crucial when comparing returns across different funds or periods. You can’t tell the whole story by comparing returns over different periods.

Using incorrect formulas: It is possible to get wrong results from calculations if you use the wrong formulas or apply them wrongly. Verify that the return type you are attempting to compute is compatible with the given formulas.

## Bottomline

Gaining expertise in determining mutual fund returns entails more than just working with figures. The point is to learn all you can so you can optimise your portfolio, establish reasonable financial objectives, and make smart investment decisions.

## FAQs

How much return can I expect from mutual funds?

As per the tax and investment experts, a long-term mutual fund investor must know the 15 x 15 x 15 rule of mutual funds, where an investor can expect to get a 15 per cent return on one’s SIP after investing for 15 years.

What is a good ROI?

According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. The average annual return of the Nifty 50 Index is about 14.2% CAGR since the year 1999.

Can a mutual fund go to zero?

While extremely rare, a mutual fund’s value could theoretically go to zero if all the securities in its portfolio became worthless. However, mutual funds are diversified across many securities, which significantly reduces this risk. It’s important to research and understand a fund’s holdings before investing.

How to invest in 15 * 15 * 15 in mutual funds?

The 15 * 15 * 15 rule in mutual funds refers to investing ₹15,000 per month for 15 years in a fund that can generate an average return of 15%. This strategy, backed by the power of compounding, can potentially accumulate a corpus of approximately ₹1 crore.

Does SIP guarantee a return?

No, a Systematic Investment Plan (SIP) does not guarantee returns. The returns from an SIP depend on the performance of the mutual fund you invest in, which in turn is influenced by market conditions. Therefore, while SIPs can potentially offer good returns, they are not guaranteed.