You can switch off notifications anytime using browser settings.Mutual Fund performance: Ways of calculating returnsStock Analysis, IPO, Mutual Funds, Bonds & MoreMutual Fund performance: Ways of calculating returnsIn the fourth of the 52-part series, ET Wealth takes you through four ways of calculating returns to evaluate a funds performance.One of the crucial aspects of financial planning is the periodic evaluation of investments. Whether one invests in equities,mutual funds, debt, commodities or a mix of these, a regular review ensures that there is no digression from long-term objectives.
Mutual funds are the best vehicles for long-term planning as they invest across different asset classes and offer diversification.
Moreover, historical evidence suggests that mutual funds, especially equity-oriented ones, outperform all major asset classes, on an average, in the long run.
Yet, one needs to evaluate their performance in the medium term. This is because if a fund is not performing as per its mandate or has been consistently underperforming its benchmark, an investor must exit and move to a good performer.
One way to evaluate performance is by looking at its historical returns, of which two vital ingredients are dividend or income received and/or capital appreciation.
Lets consider the following tools, which are not exclusive for mutual fund evaluation and can be used for other asset classes.
Its one of the easiest and commonly used methods for calculating a funds return. It considers NAV on two datesat the beginning and end of the holding period. The return is calculated by dividing the absolute change in NAV by the NAV on the start date. Its advantage is that it can be applied to virtually all kinds of funds.
So, if you had invested on 1 January 2009 in a fund at a NAV of Rs 10 per unit and sold the units on 2 June 2011 at a NAV of Rs 18.5, the point-to-point return would be 85%.
While this formula is highly useful, it becomes irrelevant if one invests in the dividend option scheme of a fund. This is because the NAV of such a scheme falls once the dividend is paid. For such options, the total return is more relevant.
This overcomes the limitation of point-to-point return by including dividends. The total return is calculated by adding dividends that are distributed during the holding period, to the absolute change in NAV, and dividing it by the NAV on the starting date.
If the investment is made at a NAV of Rs 13 in August 2009 and is sold at a NAV of Rs 19 in September 2011, and the fund declares a dividend of Rs 3 per unit during this period, the total return comes to 69.23%.
It is applicable when the holding period is more than one year. It reduces the effect of volatility or short-term fluctuations on a funds NAV. CAGR assumes that the investment is growing at steady rate. So, a 3-year CAGR of 20% implies that in the past three years, the investment has grown at an average rate of 20%.
It helps in comparing performance across different funds and schemes of the same fund. Where n is no. of years, T is the terminal or maturity value of investment, and B is the start value or amount invested.
Take the first example, where the investment is made in January 2009 and redeemed in June 2011. The n in this case is roughly 2.5 years. This gives us a CAGR of 27.90%.
IRR:The above tools are useful if the sum is invested as a lump sum. If you invest through the SIP route, you need to use IRR. This tool is one of the most complicated, but an MS Excel savvy investor can use this tool easily.
Go through this link for a step by step calculation of your SIP returns.
(%)Mirae Asset Tax Saver Direct-G-0.097.818.9811.3222.21Invest NowMirae Asset Tax Saver Reg-G-0.257.318.019.7020.56Invest NowMotilal Oswal Long Term Equity Fund Direct-Growth
ELSS0.9210.0910.858.5816.22Start SIPMotilal Oswal Focused 25 Fund Direct-Growth
Large Cap0.768.748.133.8514.92Invest NowDHFL Pramerica Gilt Direct Plan – Growth
Gilt2.003.306.1810.067.70Invest NowDSP Midcap Direct Plan-Growth
Mid Cap-1.566.685.73-2.0114.37Start SIPDHFL Pramerica Hybrid Debt Fund Direct Plan-Growth
Conservative Hybrid0.763.706.039.749.47Invest NowDSP Focus Direct Plan-Growth
Multi Cap2.2210.8110.147.0712.61Start SIPMotilal Oswal Multicap 35 Fund Direct-Growth
Multi Cap1.587.417.650.3716.08Invest NowMotilal Oswal Midcap 30 Fund Direct-Growth
Mid Cap-0.758.747.360.179.12Invest NowDHFL Pramerica Large Cap Fund Direct Plan-Growth
Large Cap1.629.0211.6210.0213.86Invest NowDSP Small Cap Direct Plan-Growth
Small Cap-1.489.232.91-11.498.49Start SIPDSP Equity Opportunities Direct Plan-Growth
Large & MidCap-0.237.877.913.9515.73Start SIPDSP Credit Risk Direct Plan-Growth
Credit Risk0.151.75-0.43-0.564.96Start SIPMotilal Oswal Long Term Equity Fund Direct-Growth
ELSS0.937.216.50-2.4817.35Invest NowDSP Tax Saver Direct Plan-Growth
ELSS0.9210.0910.858.5816.22Start SIPDSP Liquidity Direct-Growth
Liquid0.581.803.697.627.20Start SIPICICI Prudential Savings Fund Direct Plan -Growth
Low Duration0.772.254.458.627.92Invest NowDSP Savings Direct Plan-Growth
Money Market0.7184.108.40.2067.00Start SIPDSP Strategic Bond Direct Plan-Growth
Dynamic Bond0.051.634.568.896.81Start SIPDSP 10Y G-Sec Fund Direct-Growth
Gilt with 10 year Constant Duration220.127.116.1110.707.42Start SIPDSP Bond Direct-Growth
Medium Duration0.912.593.806.357.53Start SIPDSP Short Term Direct Plan-Growth
Short Duration1.052.434.909.127.64Start SIPDSP Ultra Short Fund Direct Plan-Growth
Ultra Short Duration0.672.043.126.476.99Start SIPDSP Equity Savings Fund Direct-Growth
Equity Savings0.795.445.714.919.24Start SIPDSP Dynamic Asset Allocation Fund Direct-Growth
Dynamic Asset Allocation0.712.995.028.339.73Start SIPDSP Regular Savings Direct Plan-Growth
Conservative Hybrid0.834.563.220.837.12Start SIPDSP Equity & Bond Direct-Growth
Aggressive Hybrid0.818.289.156.3513.32Start SIP
– Returns less then 1 year are absolute and above 1 year are annualised.
– Returns of 1 year are absolute and above 1 year are annualised..
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