Check out the essentials of calculating and knowing the returns on your mutual funds investments. Explore why mutual fund returns have to be assessed carefully for taxation reasons.

Investment return, which is measured over a time span, is merely the aggregate value of capital appreciation and any amount of money generated, divided by the original investment amount; this is determined as a percentage. The term that is appropriate for this combined collection is total return. But when the concept of calculating the return in this form is applied to mutual funds and stocks, the scenario is a bit different.

Putting things in simple terminology, investment return is the yield that is generated over a particular period of time. It is signified as the percentage increase or decrease in the investment value during a period of time. The yield on investment for a definitive predetermined time is calculated as follows:

Now what does NAV signify? It is the market value of the securities held by the mutual fund scheme. As per SEBI, NAV or Net Asset Value determines the performance of a particular mutual fund scheme.

After you gather information about the average returns pertaining to a specific fund, you may still find it essential to calculate the absolute returns linked with the fund because it provides you with a precise notion about the generated returns. The term absolute return indicates the returns achieved over a definite period of time by the fund. It determines the percentage appreciation or depreciation in NAV of a fund over a particular time frame.

You may also use CAGR for calculating returns for a time frame that is beyond 1 year of your mutual fund investment. CAGR is best defined as the annualized returns combined with the compounding effect. The formula for calculating CAGR is as follows:

(Current NAV/Purchase NAV) (1/number of years) or (365/number of days) 1

These computations may look a little tough to take up when you first set your eyes on them. However, with a little more research and adequate knowledge of the terminology involved, you will be able to assess your ROI in little or no time at all. So, be wise and move forward as an alert investor because the capital at risk is your own hard earned money.

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