How are Mutual Funds Returns Calculated?

The performance of an MF is represented by its Net Asset Value (NAV). An MF's NAV is essentially the monetary value of securities packed in it. This value is subject to alter daily, depending on the share market.

How to calculate the NAV of an MF scheme?

Suppose the securities within an MF scheme are worth Rs. 100 lakhs distributed by issuing a total of 10 lakh units at Rs. 10 each for all interested investors. Here, the NAV per unit fund will be:

NAV of MF = total value of securities/number of units distributed

100 lakhs divided by Rs. 10 or 10000000/1000000 = Rs 15 in the NAV per MF unit.

How to calculate returns on MFs?

If you’re investing in mutual funds for beginners, you must know there are broadly 3 ways in which you can calculate MF returns.

1. Calculating absolute returns

This simple method calculates the percentage appreciation or depreciation of your MF return over a specific period – it can be two months or two years. Here is the first part of the formula to measure absolute returns.

Absolute returns on MF = Current NAV – Initial NAV / Initial NAV x 100

Borrowing from the example above, say the current NAV per unit of MF is Rs. 15 and the previous NAV was Rs. 12, then your return comes out to:

(15 – 12) / 12 x 100 = 25%

Now take this 25% and multiply it with the exact time. Or, use the second part of the formula below to factor in your MFs duration.

Current NAV – Historical NAV/ Previous NAV x 100 x 12 / (months) or (years) or (days)

You can find the historical NAV of an MF by asking your financial advisor or by checking it online.

Additional Read: What is a Mutual Fund and How Does it Work?

2. Calculating simple annualized returns

Often mutual funds for beginners are subscribed for a duration of 1 year, and this is the method used for calculating returns on them.

(1 + Absolute returns) ^ (365/ Number of days) – 1

You may use a scientific calculator or MS Excel to calculate the returns using this formula.

For example, your present NAV of Rs 20 might climb up to Rs. 25 in the say, 240 days. In such a scenario, your absolute returns will be (25-20)/20 = .25

And, now we insert this figure in the simple annualized formula above to find our MF return.

(1 + .25) ^ (365/240) – 1 = 40.4%

3. Calculating Compounded Annual Growth Rate (CAGR)

Showing the CAGR growth rate of an MF is a great way to display returns if you've subscribed to an MF for more than 1 year. The CAGR value shows the growth trend of an MF and can be plotted on a graph.

The CAGR calculation is similar to annualized returns, except these have the compounding effect. Here is the formula to calculate your MFs CAGR.

[(MF ending value / Initial value) ^ 1 / Number of years – 1] x 100

Say, the purchase NAV of your MF is Rs. 15 per unit, which rose to Rs. 25 in two years. Here the CAGR of your MF comes out to:

[(25/15) ^ (1/2) – 1] = 29.09%

Additional Read: What is the Best Time to Invest in Mutual Funds?

Summing up

As you can see, calculating returns on MF is straightforward but can be time-consuming. To avoid manual calculation, you can simply use any MF returns calculator available online.

If you want to invest in MFs but not put a lump sum into any scheme, go for a SIP or Systematic Investment Plan. This instrument allows you to earn returns on MFs with just a few thousand rupees. If you want advice on which MFs to invest in or get an expert to help you apply for one, turn to Tata Capital Moneyfy app.

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