Types of Mutual Fund Returns & Their Benefits
A mutual fund is a financial vehicle where a pool of money is collected from the investors to invest in bonds, money market instruments, stocks and other assets. Depending on the investment objectives and type of returns and securities, a mutual fund can belong to several categories.
Keep reading to know what are mutual fund returns and their types.
What Are Mutual Fund Returns?
Mutual fund returns are those returns that depend on the performance of the fund. Individuals can calculate it by evaluating the change in final investment value from the initial investment value over a particular period.
What Are the Types of Mutual Fund Returns?
There are many types of mutual fund returns. Some of which are –
- Absolute Returns – It refers to the amount by which a mutual fund scheme has increased or decreased in a certain period. Absolute returns can be positive or negative.
Let us take the example of Mr Ravi, who invested ₹ 1.5 lakhs in a mutual fund scheme. The present value of the invested amount is ₹ 2.5 lakhs. You can calculate the absolute return for Mr Ravi using the following formula –
Absolute Return = ((Final Investment Value – Initial Investment Value) / Initial Investment Value) * 100.
| Particulars | Amount |
|---|---|
| Final Investment Value | ₹2,50,000 |
| Initial Investment Value | ₹1,50,000 |
| Absolute Return | 66.66% |
Annualised Returns – It is the amount by which the invested money has grown per annum.
One can calculate this type of mutual fund return using the following formula –
Annualized Return = ((1+ Absolute Return) ^ (365/ number of days)) – 1
OR
Annualized Return = ((1+ Absolute Return) ^ (365/ number of years)) – 1
Compound Annual Growth Rate – Compound Annual Growth Rate, abbreviated as CAGR, is the rate of return by which the investment should grow from the initial investment value to its maturity value.
CAGR is computable using the following formula –
Compound Annual Growth Rate = ((Final Value/ Initial Value) ^ (1/ number of years)) – 1
Let us understand this with the help of an example –
Mr Ram invested ₹10,000 in a mutual fund scheme, and the final value is ₹14,000 over 2 years.
| Particular | Amount |
|---|---|
| Final Value | ₹14,000 |
| Initial Value | ₹10,000 |
| number of years | 2 |
| CAGR | 18.32% |
Trailing Returns – Trailing returns are the type of mutual fund returns that show the performance of a mutual fund over a specific period.
Individuals can calculate trailing returns can using this formula –
Trailing Returns = (Current Net Asset Value / Net Asset Value at the beginning of the trailing period) ^ (1/ Trailing Period) – 1
What Are the Key Benefits of Each Type of Mutual Fund Return?
The table below shows the key benefits of different mutual fund returns in India.
| Type of Mutual Fund Returns | Benefits |
|---|---|
| Absolute Returns | Diversification of relative return funds portfolio. Lower risks because of the diversified structure. Generates positive returns. Adjustable with the movements of equity market. Independent of market indexes or benchmarks. |
| Annualised Returns | Gives a preview of the performance of investment. Due to compounding, it provides a clearer idea about the worth of investment. |
| Compound Annual Growth Rate | Compares a variety of investments over a similar investment perspective. Remains unchanged with the percentage changes in the investment horizon. Fixes the limitations of arithmetic average returns. |
| Trailing Returns | Provides a clearer picture of the mutual fund scheme's performance than absolute returns. Historical data is taken into consideration for a block of period. |
An investor needs to know his/her investment objective and individual goal before investing money in any mutual fund. Knowledge about the expected returns helps investors get an idea about the scheme's performance over certain time periods.
Frequently Asked Questions
When are absolute returns calculated?
Absolute returns are calculated while looking to compute the returns for a tenure less than 1 year.
When are annualised returns useful?
Annualised returns are useful when we need to compare different mutual fund performances across different tenures.