Mutual funds are pooled investments managed by professional fund managers who invest in a diversified portfolio of securities according to the investment mandate of the scheme. The financial objective of a mutual fund investor is either capital appreciation or income. In order to provide capital appreciation or income a mutual fund scheme has to generate returns.
In this article, we will discuss about different types of returns. There are many online mutual fund calculator on AMC websites and other third party research portals. However, you need to have an understanding of different type of returns, so that you know which mutual fund return calculator to use for your specific purposes.
• Absolute Return: Absolute return is the growth in your investment expressed in percentage terms. For example, had you invested Rs 2 Lakhs in a MF scheme and the value of your investment would have grown to Rs 2.90 Lakhs after 3 years, your absolute return is 45%. One weakness of absolute return is that it ignores the period over which the return was generated.
• Annualized Return (CAGR): Annualized return, as the name suggests, measures how much your investment grew in value on a yearly basis. An important thing to note in annualized returns is that, the effect of compounding is included. Annualized return is also known Compounded Annual Growth Rate (CAGR). For example, if you invested Rs 2 Lakhs in a MF scheme and the total value of the investment is 6 Lakhs after 10 years, then the annualized returns will be 11.61%. If you input these values, a mutual fund calculator will easily throw you the same results.
• Total Return: Total return is the actual rate of return earned from the investment and includes both price appreciation and dividends. Let us assume that, you invested Rs 1 Lakh in a scheme at a NAV of Rs 20. 5,000 units will be allotted to you. The scheme NAV after 1 year is Rs 22. The value of your investments after 1 year will, therefore, be Rs 1.1 Lakhs (Rs 22 X 5,000 units). The profit made by you is Rs 10,000. Now, suppose that, during the year, the scheme gives Rs 2 per unit as Income Distribution and Capital Withdrawal (IDCW) erstwhile known as dividends. Total IDCW payment to you will be Rs 10,000 (2 X 5,000). The total return earned by you will be Rs 10,000 capital gains + Rs 10,000 dividends = Rs 20,000. The total return in percentage terms will be 20%.
• Point to Point Returns: Point to point returns measures annualized returns between two points of time. For example, if you are interested in how a mutual fund scheme performed during a particular period, say 01.01.2021 to 31.12.2021, you will look at point to point returns. One weakness of point to point returns as far mutual fund scheme performance evaluation is concerned is that, it is dependent on the market movements prevailing during the chosen time period. Use a mutual fund return calculator to find out the point to point returns.
There are several mutual fund calculator available online. You need to know which return measure to use depending upon your specific purpose e.g. selecting a scheme for your portfolio, evaluating the performance of a portfolio scheme over your investment period etc. Thereafter, using online mutual fund, you can invest in the selected scheme.