How to calculate Mutual Fund returns?

calculate mutual fund returns
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An investment today can secure your tomorrow. By investing wisely, you can build a financial cushion to help you sail through turbulent times without much hassle. A prudent investment is the one that can offer good returns without putting your money at much risk.
Mutual fund investments, if done carefully, can help you generate good returns over time. But have you ever wondered how mutual fund are returns calculated. Here’s the answer:

How to compute your mutual fund returns?

If you are wondering how to calculate mutual funds returns, here are four different ways to do so:

Absolute Returns
Point-to-point returns or absolute returns, can be calculated by using the initial and final investment value over a period.
The formula for the same is as below:

Absolute Return = (Final Investment Value – Initial Investment)/Initial Investment *100

Thus, if you invested Rs.20,000, then 1 year later, the value of your investment would be Rs.25,000. In addition, if you decide to stay invested for another 3 years, the absolute returns would be 25%.

Simple Annualised Return
While mutual funds do not grow at a constant rate, simple annualised returns are calculated assuming a constant rate of growth for easing calculations.

Simple Annualised Return: [(1 + Absolute Rate of Return) ^ (365/number of days)] – 1

Compounded Annual Growth Rate (CAGR)
Mutual fund calculators take into account the compounded growth of your principal amount and the interest earned over the investment period. CAGR is generally considered to be one of the best indicators of growth on interest. You can get a more accurate estimate of the profitability of your investment when you use CAGR to calculate mutual funds returns.

CAGR = [{(Current Net Asset Value / Initial Net Asset Value) ^ (1 /Number of years)} - 1] *100

You can use Microsoft Excel to calculate CAGR by using the formula: RRI (Time Period in months, Current NAV, Initial NAV). Convert the result into percentage format to get the CAGR value.

Extended Internal Rate of Return (XIRR)
While the other three methods of calculating returns from mutual funds focus on lumpsum investments, you can use the Extended Internal Rate of Return (XIRR) method for your Systematic Investment Plans (SIPs). This helps you calculate returns earned from all instalments that have earned interest over different durations depending upon when they were invested.
XIRR can be calculated in Excel using the values for SIP (instalment amounts) and dates (SIP instalment dates).

Here are the steps to follow in Microsoft Excel to use the XIRR formula:

  1. Make two columns in Microsoft Excel and add dates of SIP investment in one column and SIP amount in the other
  2. Enter the redemption date and amount in the last row of the columns
  3. Use the XIRR function
  4. Select the amount column (values) and date column for the date formula
  5. Convert the result into a percentage to get the value

These methods help you get a good idea about the returns you can expect from your mutual fund investments. Alternatively, you can use one of the mutual fund calculators online to compute your returns from mutual funds. There is no need to do the calculation or even know ‘how is mutual fund return calculated’. All you need to do is enter the total investment amount, expected return rate, and investment period to get the results.


How to calculate mutual fund returns in SIP?

For Systematic Investment Plans (SIPs), each investment is made in the mutual fund for a different duration. Therefore, it is easier to use the Extended Internal Rate of Return (XIRR) formula in Excel to calculate mutual funds returns from SIPs.
You will need these details to calculate the returns from SIP:

  • SIP amount
  • Dates of each SIP investment
  • Date of redemption
  • Total amount at redemption

Now that you know how the mutual fund is calculated, you can do the math manually, or you can use an online SIP calculator to get an idea about the expected returns from your mutual fund investments.

What would be the value of Rs.1 lakh after 15 years?

The inflation rate determines the future value of an amount. For instance, if the inflation rate is 5%, then Rs.1,00,000 will be worth Rs. 48,000 in 15 years. The value decreases with the increase in time horizon.

How to save Rs.20 lakhs in 3 years?

Budgeting can go only so far; you must start to invest your savings to make your money work for you and build a larger corpus. For example, if you want to save Rs.20 lakh in 3 years, assuming an average return of 7%, you must start by investing roughly Rs. 50,000 per month in mutual funds.

How to make Rs. 1 crore in 10 years in mutual funds?

If you have a moderate to high-risk appetite, investing in equity funds can help. Assuming an average annual return rate of 12%, you must invest Rs.36 lakh to fulfil your goal of accumulating Rs.1 crore in a decade. If you want to go the SIP route, then it comes to roughly Rs.65,000 per month.
All computations provided in this communication is for illustrative purpose only

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.