Return is the yield that an investment generates over a period of time. It is the percentage increase or decrease in the value of the investment in that period. Returns on mutual funds are expressed in 2 different ways, viz, absolute and annualized. The most popular one being the
A mutual fund fact sheet shows the fund facts and the most important to us as investors are its return. The returns are usually given for 1-month, 3-month, 6-month, 1-year, 3-year, 5- year and so on. The returns for 1 to 3 months is given in absolute basis and the returns from 1 year and above are given in absolute basis. So when you see a 5% under the 3-month column, it means the fund has given 5% in 3 months time.12% annualized return in 3 years means 12% return earned every year for the past three years and not 12% total return in 3 years.
Albert Einstein hasnt simply said that compound interest is the 8thwonder of the world. Compounding can do wonders to your money. 12% annualized return can double your money in 6 years. And15% annualized return can double your money in less than 5 years!Below is the table that shows how long different interest rates take to double your money.
Absolute returns, also known as point-to-point returns, calculate the simple returns on initial investment. To calculate this return all one needs is the initial and ending NAV (present NAV). In this method, the duration of holding the fund is not important. One usually uses absolute returns to calculate returns for a period of less than one year.
Absolute returns = ((Present NAV Initial NAV)/ Initial NAV) *100
Annualized return is the amount of money the investment has earned for the investor per annum. CAGR is compounding of returns earned over a period of time. It provides a snapshot of the of an investments performance but doesnt give investors any indication about the volatility. Using annualized return gives a clearer picture when comparing various mutual funds that have traded over different periods of time. However, this is applicable only if you re-invest your gains every year.
Annualized return = ((1 + Absolute Rate of Return) ^ (365/no. of days)) 1
Annualized return = ((1 + Absolute Rate of Return) ^ (1/no. of years)) 1
The above table shows the NAV ofAditya Birla Sun Life Tax Relief 96,(which has been taken only for the purpose of illustration).The returns up to 1 year are the same in the case of absolute and annualized. The returns after 1 year are different. While the absolute returns show how much the investment has grown from the initial date, annualized return show how much the fund grew annually to reach that current return. This doesnt mean the fund grew at a certain rate every year. Its just the average growth of the fund year on year. Annualized return normalizes the absolute return and lets you know the returns over a given period of time.
Mutual funds returns are reported on an annualized basis. And mutual fund returns fluctuate across years. This is the reason why 1-year returns may appear higher than 3 years returns.
Aditya Birla Sun Life Tax Relief 96, one of the top fund in tax saving category of mutual funds has the following returns.
1yr: 18.16% annualized return = 1 lakh invested in this fund 1 year ago has become 1.18 lakh today
3yr: 11.98% annualized return = absolute returns of 40% in 3 years = 1 lakh invested in this fund 3 years ago has become 1.40 lakh today
5yr: 22.66% annualized return = absolute returns of 177% in the last 5 years = 1 lakh invested in this fund 5 years ago has become 2.77 lakh today.
5 year 22.66% annualized return mean that money invested 5 years ago in the fund has grown 22.66% every year, not 22.66% overall but instead 177% overall. This is the principle of compounding at work growing ones investment over the years!
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Thanks for the article.I have been investing monthly sips in 6 funds with SBI-MF. However, for instance, SBI Bluechip fund shows 16% absolute returns after 3 years. So I do not understand why is there such a big difference between website information and my current growth rate? Could you please shine more light?
Mutual fund returns are quoted for lump sum or point-to-point returns. For instance, SBI Bluechip fund shows 9.74% 3-years annualized returns on 12 July 2018. It means that ₹1 lakh invested 3 years ago on 12 July 2015 would have effectively grown 9.74% every year to ₹1.32 lakh today.
In SIP investment, money gets invested every month and the effective returns could be higher or lower than point-to-point returns. Taking the same example for SBI Bluechip SIP returns, an SIP of ₹10,000 p.m. started 3 years ago would have grown at 12.99% p.a to ₹4.32 lakh.
The SIP annualized returns could be higher or lower than point-to-point returns. However, you can expect the variation in SIP returns to be less than point-to-point returns.
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Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Portfolio returns and allocation between equity and debt are estimated based on a number of factors including the users risk profile, goal horizon and disclosed financial position. Performance of any investment portfolio can neither be predicted nor guaranteed.