The amount of money you get after a specific time period in response to the investment made in a mutual fund scheme is known as mutual fund return. Well, if you plan to get a high return over your mutual fund investments, it is important that you must establish a realistic financial goal. For this, it is very important that one must understand the area where the investment is being done.
When it comes to mutual fund investments, it is one of the most popular options. These are good for those who are willing for long-term investments and even for those who are looking for short-term investments. However, the success or getting good returns in mutual fund investment lies in the type of funds you choose. Here you will get to know about the different types of mutual fund returns.
Types of Mutual Fund Investment Returns
- Annualised return- As the name indicates, annualised return means the amount of return an investor gets on an annual basis. For example, if you make an investment of ₹ 1 Lakh then your investment grows to ₹ 1.4 Lakhs, here you will get an absolute return of 40% but the annualised return is 11.9% because of the compounding effect.
- Absolute Return – It means the rise or fall in the investment in terms of percentage. This is used for mutual funds that have the tenure of less than a year. In case of investment of more than 1 year, then it falls in the annualised return category.
How to Calculate Absolute Return: Let us say that the present market value of a fund is ₹ X where the investor had originally invested ₹ Y then the absolute return would be [(X-Y)/Y]*100 = Z %
- Total Return – This means that total return the investor gets from the investment. Let us take an example to explain the same. An investor invests ₹ 1 Lakh in a mutual fund scheme and at that time, the Net Asset Value was ₹ 20 per unit. It means that you have purchased 5000 units. After a span of one year, the NAV becomes ₹ 24 for the same mutual fund. Then the value of your purchased units will become – 5000*₹ 24= 1,20,000 . It means that in a year you have earned a profit of ₹ 20,000 (₹ 1,20,000- ₹ 1,00,000). Let us say that the mutual fund scheme that you have taken declares a dividend of ₹ 3 per unit then the overall dividend becomes = 5000 units *₹ 3 per unit= ₹ 15,000. Thus the total return becomes= dividend + capital gains = ₹ 20,000+₹ 15,000= ₹ 35,000 which makes the overall return 20%.
- Trailing Return – It is annualized mutual funds return of a specific training period which ends today. Let’s take an example to explain this, say the Net Asset Value of a mutual fund scheme in the current time is ₹ 100 and it was ₹ 60 three years back. Calculation of Trailing Return-
(Present Net Asset Value /Net Asset Value at the start time) ^ (1/Trailing Period) – 1, thus the trailing return becomes 18.6%.
- Annual Return – The name indicates that the annual return is the return earned from a particular mutual fund scheme in a year. For example, the Net Asset Value of a fund was ₹ 100 on January 1st and on the last day of the same year, i.e. 31st December, the Net Asset Value ₹ 100 then the return is 10%.
Mutual Fund Returns are calculated using Compound Annual Growth Rate (this is applicable to mutual fund investment for more than 3 years). The formula for CAGR or Compound Annual Growth Rate
CAGR = [(Current Net Asset Value / Beginning Net Asset Value) ^ (1/number of years)]-1
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