One important method for judging your portfolio's performance is to compute the returns on your mutual fund investments. Returns enable you to assess if the growth projected by your mutual fund schemes has aligned with your financial goal. Today's mutual fund schemes provide a wide range of options, so return calculation helps compare them so investors may make well-informed judgments. However, several stages and factors must be precisely taken into consideration when calculating mutual fund returns. With the appropriate equipment, this might become easier. Fortunately, the procedure is simplified by easily available online mutual fund return calculators. This post will explain how to use these online calculators, the essential factors, and how to utilise mutual fund returns for portfolio analysis. With this information, you may use internet tools to compare and monitor your mutual fund investments wisely.
Why Should I Learn to Calculate Return on Mutual Funds?
- Helps you evaluate how well your mutual fund investments have performed
- Lets you compare returns across different mutual fund schemes and make informed decisions
- Track if your mutual fund investments are in line with your financial goals
- Assesses fund manager performance over different periods
- Identifies poorly performing schemes that may need re-evaluation
How to Calculate Mutual Fund Returns?
To calculate mutual fund returns, you need three key inputs:
1. Initial Investment Amount:
This is the amount you initially invested in the mutual fund scheme. For systematic investment plans (SIPs), take the first SIP amount as the initial investment.
2. Current Market Value:
This is the current NAV of your mutual fund investment. This can be found in your portfolio statement. For ongoing SIPs, take the total market value of all SIP installments.
3. Investment Duration:
The number of years or months invested. For SIPs, take the period from the first to the latest SIP.
Formula to Calculate Mutual Fund Return
The formula to calculate mutual fund returns is
Mutual Fund Return (%)= ((Current Market Value-Initial Investment Amount)/ Initial Investment Amount)*100
Let's understand this with an example:
* Initial Investment in Fund A: ₹50,000
* Current Market Value of Fund A: ₹70,000
* Investment Duration: 2 years
Mutual Fund Return = (Current Value – Initial Investment) / Initial Investment x 100.
= (70,000 – 50,000) / 50,000 x 100
= 40%
Thus, the 2-year return that Fund A generated is 40%.
How to Calculate Annualized Returns
The above calculation gives the overall return over the entire investment duration.
However, we calculate annualised returns to better compare returns over different periods.
This shows the compounded annual growth rate or CAGR.
The formula to calculate annualised return is:
Annualized Return (%) = (Current Market Value / Initial Investment )^(1/No. of Years) - 1 x 100.
For the earlier example, the annualised returns will be:
* Initial Investment in Fund A: ₹50,000
* Current Market Value of Fund A: ₹70,000
* Investment Duration: 2 years
Annualized Return = ((70,000 / 50,000)^(1/2)) – 1) x 100
= 18.32%
The annualised return for Fund A is 18.32%.
Returns from Direct vs Regular Plans
There are direct and regular mutual funds with various expense ratios. Regular plans have a higher. Expense ratio and tend to provide lower returns than direct plans.
When comparing returns across funds, remember to compare returns for the same plan type.
Use Online Portfolio Trackers
Rather than manually computing individual scheme returns. You can use the free online portfolio tracker mutual fund investment platforms provide.
These trackers give you a consolidated view of returns across all your mutual fund investments.
Understand Returns Over Different Periods
While comparing mutual fund returns, look at returns over different durations - 1 year, 3 years, 5 years, and since inception.
A scheme that has given higher 1-year returns may underperform over a 3-5-year period. Looking at longer-duration returns gives you a better perspective.
Factor-in Risk Metrics
Examine the mutual fund scheme's risk measures and returns. The volatility and risk-adjusted return of the fund are shown by metrics such as beta, standard deviation, and Sharpe ratio.
Better performance may only sometimes equate to greater returns with more volatility than lower returns with lower volatility.
Monitor Returns Regularly
Don't just look at returns once. Monitor your mutual fund investments quarterly to spot any drastic underperformance compared to category averages and benchmarks.
Review schemes need to deliver satisfactory long-term returns.
Conclusion
Calculating returns is crucial to keeping an eye on mutual fund investments. It helps you assess performance and come to wise decisions. Manual calculations, however, may be complicated and time-consuming. The good news is that the procedure is made simpler by user-friendly online refund calculators. You may calculate lump sum and SIP returns by inputting important information such as investment amount, current value, and period. INDmoney and other top investing platforms provide these calculators. Utilise them to keep track of your mutual fund investments' results centrally. Additionally, for a more comprehensive study, take into account risk indicators like the standard deviation and Sharpe ratio in addition to returns. Maintaining a close eye on risks and returns will enable you to meet your investing objectives over time.