How Are Returns on Mutual Funds Calculated?


Mutual funds are a rewarding investment option although they depend on market conditions as well. Calculation of mutual fund returns and comparison using performance tools will help investor to choose the best investment option.

A mutual fund is an investment scheme that is professionally managed. It is run by an Asset Management Company which acts as a mediator for the investors. The AMC collects money from a large number of investors and invests it in shares, bonds, securities and money market instruments.

So when you say you have a mutual fund, it means you own a part of a big investment fund. Each investor is assigned a specific number of units proportionate to the amount he invested in the fund. The investor is called the unit holder and he shares all gains, losses and incomes from the fund proportionate to his investment in it.

Who Manages the Mutual Fund?

There is a person called Fund Manager who manages each Mutual Fund scheme. He decides the investment objectives and strategies. He tracks the investment daily and decides when to buy, sell shares and so on. The mutual fund units you own indicate your part of holdings on the scheme. The Net Asset Value (NAV) depicts the worth of this fund and it fluctuates constantly depending upon the changes in the fund holding’s prices. If you as an investor decide to redeem your units, you may do so in the current prevailing price.

SEBI is the regulator of all mutual funds in India.

How to Invest in Mutual Funds?

There are many ways you can buy best mutual funds:

Direct Plans– You can directly purchase the plan of your choice from the AMC. This saves distributer commission.

Mutual Fund via Distributor– Here, a registered distributor helps you complete formalities to finish purchase of mutual funds , of course by charging commission .

Purchase Online– There are many third party portals from where you can buy mutual funds online by paying a nominal fee for the service.

Nature of Mutual Funds

There are 2 types of mutual fund investments you can make- lump sum or systematic investment plan(SIP).

Under lump sum investment, you invest a big chunk of your money in a mutual fund of your choice. This is usually done when you get a big amount from a sale of an asset or property. There is more risk involved in lump sum investment.

Under systematic investment plan, (SIP), on your request, bank will deduct a fixed sum from your account each month and invest it in the mutual fund of your choice. Here you continuously buy units and get the compounded benefit. You keep investing regularly for a long time until the time-period is over and you get back the maturity amount. SIP investments and the amounts are pre-decided. Depending on the value of the fund on any day, you get the units. You start accumulating units when the investment starts. The day you exit, you may redeem your units and get back the maturity amount.

What are Returns?

Returns are used to measure how much the value of an investment has increased or decreased over a specific period.

Mutual Fund Return Calculation

With mutual funds, people get a huge profit in a short time. So calculating of accurate returns is important. In short, return on mutual fund is the increase in capital plus generated income divided by the total investment amount.

The calculated amount is the total return and a percentage value. By understanding the returns, you can know as to which are the better investment processes.

The average annual returns calculation which some may resort to does not always show the realistic picture. It is calculated as the arithmetic mean of total returns earned over a period.

Calculation of individual growth for a specific period is crucial to arrive at the overall results of the returns on mutual funds.

Ways to Calculate Returns on Mutual Funds


Calculating mutual funds returns annually is more accurate than considering the entire period. This is called the compounded annual growth. This is ideal way of calculation of your return if your investment is for more than a year. It is calculated as:

CAGR (compounded annual growth rate) = [(F/S) ^ (1/n)]-1, where F is the final value, S is the initial value and n is the holding period.  This value shows if there is a growth or drop in the mutual fund prices.

This number basically shows how much the investment would have grown if it had yielded a steady return.

XXIR Return

When calculating SIP returns, where calculation of cash flow is needed, XIRR value is more accurate. Cash inflow and outflow may not always match in SIP.

They could also be at irregular intervals. XIRR is a function in excel which when applied calculates the annual yield of a series of cash flows at irregular intervals.

You will need the following values to calculate XIRR:

Amount of SIP
Dates of all SIP investments
Redemption date
Maturity amount

To calculate, in an excel sheet, enter transaction dates in 1 column and SIP values on another. Enter the redemption date in the end and the redemption value against it. Then apply XIRR (on both columns) * 100 to get the rate of return on SIP.

Absolute Returns

For calculating Absolute return on your policy, all you need is the initial and the final or current net asset value(NAV). The holding period does not come into effect in this. The formula is:

Absolute Return= (current value-original value) / original value

Relative Returns

Relative returns as the name suggests is used to calculate the current return’s performance with a set benchmark. For instance, you can compare a domestic mutual fund with an index fund.

Relative return = Absolute return of your fund – Absolute return of the benchmark

The above methods only provide an insight into different methods used to calculate mutual fund returns. At the end of the day, the investor has to make a wise choice of which method to use based on the kind of investment.