Calculating Mutual Fund returns made easy by following these simple steps

New Delhi : ET MONEY charts out a few methods which can ease up the complexities associated with the calculation of mutual fund returns.

Mutual funds have become a favourite investment option of many as it provides the flexibility to invest in parts through SIPs which attracts even small investors to invest in them. Like any other investment vehicle, mutual fund returns are also calculated by adding the appreciation of your investment over a certain period of time as compared to the initial investment you made before starting the mutual fund investment. Every mutual fund has a net asset value or NAV and this value indicates the current price of your held units, which are used to calculate returns for your mutual fund investments. But many are still not clear with the workings of it and find it difficult. Here the entire method of calculating mutual fund returns is charted out in simple and understandable language. Let's take a look.

There are different ways of calculating mutual fund returns specified below for your clear understanding

Absolute Returns:

This type of returns are calculated by referring to the amount by which a mutual fund scheme has changed at the time of its redemption. For example, If you made a lump sum investment of Rs. 1,75,000 on 28 May 2019, and the present value of the investment is Rs. 2,25,000. In this case, calculating the absolute return will give you the exact numbers of your earnings.

Absolute Return % = (Current Value - Investment Value) / Investment Value x 100

= (2,25,000 - 1,75,000) / 1,75,000 * 100

= 28.57

The absolute return specifies the growth of your investment without taking into consideration the investment time period. It is simply calculated on the basis of the percentage difference in the amount you had before investing and the money you have at present.

Annualized Returns:

The returns earned by mutual funds on a yearly basis are referred to as annualized returns, which are calculated using the following formula.

Annualized Return = (Final Investment Value ÷ Initial Amount Invested)^ (1/number of years)  — 1

Compounded Annual Growth Rate (CAGR):

CAGR gives the growth rate of specific invested amount over a certain period of time. It also takes into account the interest earned on the principal invested amount, as well as any accumulated on the interest itself. CAGR represents the consistent rate at which the investment would have grown if the investment had compounded at the same rate each year. The formula for calculating CAGR is given below:

CAGR = [(Current Value / Investment Value)^(365/Number of Days)] - 1

Extended Internal Rate of Return:

XIRR or Extended Internal Rate of Return is used to calculate mutual fund returns for the SIP mode of investment, which involves regularly investing small amounts in mutual funds for a predefined interval. Calculating XIRR is complicated, so a Mutual Fund Calculator is recommended to give the exact estimated figures of your mutual fund return.