Know Your Mutual Fund Returns

Investment Returns

Whenever we want to invest in a fund, we analyze certain parameters. What is the one parameter we definitely look for? Returns! It is one of basic benchmarks we use to decide the fund quality and indicate how much the fund has gained or lost over a given tenure.

But what returns should we look for? There are so many types of returns around. Which one would be appropriate? Well, each one has its own application and we should look at most of them to get an overall idea of the fund performance. This will help us to interpret the performance better.

  • Absolute Return: Also known as Total return, it is the amount of funds that the investment has generated over the investment period. It is calculated as:

{(Redeem Price – Cost Price)/Cost Price} * 100.

Suppose you have made a lump sum investment of Rs.10000 in a fund. After 2 years, the valuation of your investment becomes Rs.25000. Then the Absolute Returns will be {(25000-10000)/10000} * 100 i.e. 150%. This parameter helps us understand how much the investment has gained or lost.

However, Absolute Return calculation has a disadvantage that it does not take the Time Value of Money into account.

  • Compounded Annual Growth Rate (CAGR): It is the growth rate of an investment year-on-year over an investment horizon of greater than a year. It is calculated as follows:

{(Ending Value/Beginning Value)1/Number of Years – 1} * 100

For example, suppose for the same investment stated in the previous example, the CAGR turns out to be 58.11%. This means, the investment has grown at the annual rate of 58.11% for two years.

This method is better than Absolute Returns because it takes Time Value of Money into account.

However, it also has a demerit. It’s gives an imaginary figure as it assumes the growth has been steady thought the period which in reality is often not true. Thus, it doesn’t indicate that whether any year during the investment period was either bearish or bullish.

  • Relative Return: It is the excess return generated by the fund over the benchmark index’s returns. It tells us whether the fund has outperformed or underperformed the benchmark. Suppose a fund has generated a return of 20% whereas the benchmark index during the same period has generated a return of 11.5%. this means that the fund has outperformed the benchmark by 8.5%. This gives an idea of the value addition by the fund-manager. An important point to be noted is that, the benchmark should be carefully chosen such that it matches the investment style of the fund, to avoid misinterpretation.
  • Trailing Return: A trailing return looks backward from a particular date for a fund’s annualized return over a specific time period–usually ending on the last day of the most recent day, month, quarter, or year. i.e. it looks backward at return from the most recent point in date, for e.g. past 1 year return from today, past 3 years return from today and so on. Most of the websites providing fund performance provides trailing returns snapshot. It is calculated as follows:

{(Value today – Value at a past point in time)/ Value at a past point in time} * 100

Suppose the latest NAV of a fund is Rs.250 and exactly a year back it was Rs.150, then the 2-year trailing return is 66.66%.

This parameter is very useful in comparing a fund against its category average, benchmark and other funds in the same category.

However, it should be kept in mind that if the fund’s recent performance has been very strong, that can bias a fund’s trailing returns for the better, masking past problem periods. Also, it is difficult to judge the consistency of the fund using Trailing Returns.

  • Calendar Return: Calendar return is the absolute return from Jan 1 to Dec 31 calculated for every year. It tells us how the fund has performed in bullish and bearish market. By comparing calendar returns of a fund against calendar returns of the benchmark, we can see if the fund was able to contain losses in a bear market and if it was able to generate better returns in a bull market. For example:


As it is evident from the above table, the fund has outperformed the benchmark and category average 6 out of 7 times. In year 2010 and 2015, it was able to contain the losses better than the benchmark and the category average. Only in 2011, it has underperformed.

  • Rolling Return: Rolling return gives us a picture of the consistency of a fund’s performance. It is average annualized returns taken for a specific period frequently (like on every day/week/month) and taken till the last day of the duration. If the average of rolling returns for the fund is higher than its benchmarks, it means the fund has outperformed the benchmark for more rolling intervals. A study of rolling returns can show whether a fund is a consistent performer or there is volatility in short periods. Analyzing rolling returns can also reveal the maximum return and the minimum return which helps to assess its best and worst periods (years, months, quarters) in terms of returns.
  • Internal Rate of Return (IRR): IRR is used for calculating the returns when there is a cash flow on a periodic basis. For example, SIPs. The cash flows should be equally space in time.
  • Extended Internal Rate of Return (XIRR): When the cash flows are not equally spaced in time, we use XIRR. In this case the time of such investment also assumes significance to yield a certain outcome as the investment and redemption occurs at irregular intervals. 

So, which return should we consider for our investments? Well, each one is relevant and has a specific purpose. CAGR smoothens the returns and can be used to compare two investment options like FD and MFs. Calendar returns and Rolling Returns help us to know about the consistency of the performance of the funds. Relative and Trailing returns are useful for comparison of funds. IRR and XIRR are used when there’s cash flows. Thus, it’s better to understand about all of them so that you can draw a clear picture of what you can expect as your ROI.

“People ought to recognize that the average fund can never outperform the market in total.” – Jon Fossel, 2007 – The Little Book of Common Sense Investing by John C. Bogle


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