Returns in Mutual Funds

Mutual Funds returns are calculated by computing appreciation in the value of your investment over a period as compared to initial investment made.

Investors can earn returns through mutual funds in three ways:

1. Income from stock dividends-Income can be earned in the form of dividends from the shares and interest on bonds included in the investor's portfolio. Investor either can retain or invest the dividend received by him.

2. Capital Gain from securities sell- Mutual fund can earn capital gain from the securities sell by the fund manager and they pass on this profit to the investors of the respective schemes.

3. Capital Gain in the value of scheme-Capital Gain is earned by the investors if the value of the scheme increased from the cost of investment.

One should avoid the temptation to review the fund's performance each time the market falls or jumps up significantly. For an actively-managed equity scheme, one must have patience and allow reasonable time - between 18 and 24 months - for the fund to generate returns in the portfolio.

The winners of today may not continue with the winning streak year after year. In other words, reviewing the performance as mentioned above may not always be fruitful. Moreover, tracking and reviewing of a scheme's portfolio is quite different from reviewing one's own portfolio. A mutual fund investor should not worry themselves about the portfolio of a fund because that's the fund manager's job.

WATCH  OUT

You  may tempt  into taking unwarranted impulsive decisions by frequent reviewing and tracking of mutual fund returns. Do not let an fall in NAVs tempt you to discontinue SIPs or redeeming units from a fund. When there are market falls steeply, try to invest lump-sum amount. An annual review comparing the fund with the benchmark as well as with the category peers will certainly help and advisable. This exercise can be done by your Mutual Fund Advisor efficiently.

How to calculate returns in Mutual Funds

Absolute Returns- Absolute return is simple increase or decrease in your investment in terms of percentage. It does not take into account the time taken for this change.

For example. If you invested Rs.1,25,000 and current market value of investment is Rs. 2,00,000 then absolute rate of percentage is (2,00,000-1,25,000/1,25,000)=60%

Annualised Returns-A Compound Annual Growth Rate(CAGR) measures the rate of return over an investment period.

CAGR=[(Current Value/Beginning Value)^(1/#of years)]-1

The Bottom Line

Before investing in a mutual fund, investors should understand their individual goals for the investment over their specified time horizon. If an investor knows their expected return, they can measure the mutual fund's performance over specific time periods and determine whether or not the investment's performance is meeting their objectives

You can use below links for investments in mutual funds

Invest in Aditya Birla Sun Life Mutual Fund

Invest in SBI Mutual Fund

Invest in Parag Parikh Mutual Fund      

For. other links or investments in mutual fund kindly contact me.

Disclaimer: Mutual funds are subject to market risks read all scheme related documents carefully.

CS Shweta Jain

Certified Mutual Fund Advisor