Here is what you need to know about mutual fund returns, so you can keep a better eye on your investments.
EXPLORE FUNDS
Mutual Fund returns
EXPLORE FUNDS
4 mins read
3 Apr 2024
Investing in mutual funds has become a popular choice for many Indians looking for ways to grow their wealth. One of the key factors that investors consider when choosing a mutual fund is its returns. This article will explain what mutual fund returns are, the different types of returns, how to calculate them, and the factors that can affect them.
Understanding mutual fund returns involves knowing that they are the gains or losses made from an investment over a specific period. These returns are often reported as percentages and serve as an important measure of the fund’s performance. Mutual fund returns can be complex and confusing, but they are crucial in assessing the success of your investment.
Understanding returns from mutual funds
When assessing the performance of a mutual fund scheme, solely focusing on its returns can be misleading. While a scheme might have delivered a 10% annualised return over recent years, it is essential to consider the broader market context. If market indices have experienced similar growth during that period, it may not indicate exceptional performance. The true test of a scheme's worth comes during market downturns when its NAV falls more than its benchmark. This underperformance signals a need for review and potential adjustments to one's investment strategy.
Comparing a scheme's returns against its benchmark provides valuable insights. Consistent underperformance relative to the benchmark over time may warrant removing the scheme from one's portfolio. Identifying both underperformers and outperformers over a longer timeframe is crucial. Additionally, evaluating category average returns offers further perspective. Even if a scheme outperforms its benchmark, comparing it to its peers within the category can reveal whether it is truly a top performer or if there are better options available. Such assessments help investors make informed decisions about reallocating their investments to optimize returns and align with their financial goals.
Types of mutual fund returns
- Absolute returns:This is how much your investment grows in percentage, no matter how longyou have invested. For instance, if you put Rs. 2,00,000 into a mutual fund and it grows to Rs. 2.5 lakhs in 4 years, your absolute return is 25%.
- Annualised returns:This is the return you get each year. It takes into account the effect of compounding interest.
- Total returns:This is the overall gain from a mutual fund, including any interest, dividend, distributions, and increase in value over time.
- Point to Point returns:This is the annual return recorded between two specific points in time. You just need the start date and the end date of a mutual fund scheme to calculate this.
- Compounded Annual Growth Rate:This is the annual return over a specific period that ends today. The formula to calculate trailing return is similar to point-to-point returns but uses today’s NAV and NAV at the start of the trailing period.
- Annual return:This is simply the return earned from a scheme between January 1st and December 31st of a particular year.
- Trailing return: It denotes the annualized return over a specific trailing period, concluding today. For instance, if a mutual fund scheme's NAV today stands at Rs.100, and it was Rs.60 three years ago, the formula for calculating the trailing return in Microsoft Excel would be (Today's NAV / NAV at the beginning of the trailing period) ^ (1/Trailing Period) - 1. Hence, the three-year trailing return would amount to 18.6%. Similarly, if the scheme's NAV five years ago was Rs.50, the five-year trailing return would be 14.9%.
- Rolling returns: It represent a mutual fund scheme's annualized returns over a defined period, such as daily, weekly, or monthly. These returns are compared with the scheme's benchmark or fund category until the conclusion of the designated duration. Benchmarks could include Nifty, CNX - Midcap, CNX - 500, BSE - 200, BSE - Midcap, while fund categories might encompass midcap funds, large cap funds, balanced funds, diversified equity funds, among others.
- Compound Annual Growth Rate (CAGR): It serves as a method for computing returns from mutual fund investments held for more than a year. This approach mitigates short-term fluctuations and volatility in the Net Asset Value (NAV) of the funds. The CAGR calculation assumes a steady pace of investment growth. To manually calculate the Compound Annual Growth Rate (CAGR), the equation is as follows:
CAGR = [(Current Net Asset Value / Beginning Net Asset Value) ^ (1/number of years)] - 1
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How to calculate mutual fund returns
Each type of mutual fund return comes with its own formula, as follows:
- Absolute returns: This is how much your investment has grown in total. The formula is:
Absolute return = {(Final investment value – Initial investment value)/Initial investment amount}*100 - Annualised returns: This is the return you get each year, assuming your investment grows steadily. The formula is:
Annualised return = ((1 + Absolute Rate of Return) ^ (365/no. of days)) – 1 - Total Returns: This is the total gain from a mutual fund, including any interest, dividends, and increase in value. The formula is:
Totalreturns = {(Capitalgains+Dividends)/Totalinvestment}∗100 - Point-to-point returns: This is the yearly return between two specific dates. You need the start and end dates of a mutual fund scheme to calculate this.
- Trailing returns: This is the yearly return over a period that ends today. It uses today’s NAV (Net Asset Value) and NAV at the start of the period. CAGR = {[(Present NAV / Initial NAV) ^ (1 / number of years)] −1} × 100
- Annual return: This is the return earned between January 1st and December 31st of the year.
Mutual funds in India 2024 – Estimation of returns
Estimated return from moderate risk equity funds
Scheme Name | 1 Year | 3 Years | 5 Years |
Aditya Birla SL Frontline Equity Fund (G) | 14.57% | 23.59% | 12.47% |
DSPBR Equity Opportunities Fund - Reg (G) 10.67% | 19.88% | 26.57% | 15.26% |
Franklin India Bluechip Fund (G) | 12.08% | 23.30% | 10.80% |
ICICI Pru Focused Bluechip Equity Fund (G) | 23.22% | 16.98% | 15.15% |
Invesco India Equity & Bond Fund (G) | 13.97% | 17.48% | 10.91% |
Invesco India Growth Opp Fund (G) | 18.03% | 23.55% | 13.36% |
Kotak Select Focus Fund (G) | 13.70% | 24.72% | - |
Mirae Asset India Equity Fund - Reg (G) | 14.24% | 19.75% | 13.53% |
Parag Parikh Long Term Equity Fund - Reg (G) | NA | NA | NA |
SBI BlueChip Fund - Reg (G) | 15.08% | 24.19% | 13.69% |
Estimated return from high risk equity funds
Scheme Name | 1 Year | 3 Years | 5 Years |
Aditya Birla SL Equity Fund (G) | 9.39% | 11.42% | 8.06% |
Franklin India Prima Fund (G) | 23.43% | 28.87% | 14.93% |
Franklin India Smaller Cos Fund (G) | 37.95% | 42.29% | 18.63% |
HDFC Mid-Cap Opportunities Fund (G) | 33.90% | 36.72% | 19.02% |
ICICI Pru Value Discovery Fund (G) | 25.10% | 31.80% | 16.84% |
Mirae Asset Emerging Bluechip - Reg (G) | 18.38% | 27.25% | 18.21% |
Sundaram Mid Cap Fund (G) | 14.08% | 25.81% | 14.11% |
Estimated return from moderate-risk tax-saving funds
Scheme Name | 1 Year | 3 Years | 5 Years |
Axis LT Equity Fund (G) | 5.24% | 16.74% | 10.59% |
Invesco India Tax Plan (G) | 16.64% | 22.11% | 12.91% |
Franklin India Taxshield (G) | 20.59% | 29.55% | 14.00% |
DSPBR Tax Saver Fund - Reg (G) | 18.48% | 27.85% | 16.44% |
Estimated return from hybrid funds
Scheme Name | 1 Year | 3 Years | 5 Years |
Aditya Birla SL Balanced '95 Fund (G) | 8.63% | 10.84% | 16.81% |
ICICI Pru Equity & Debt Fund (G) | 20.35% | 30.28% | 16.92% |
HDFC Balanced Advantage Fund (G) | 23.29% | 11.63% | 19.18% |
Estimated return from short term debt funds - Low risk
Scheme Name | 1 Year | 3 Years | 5 Years |
Aditya Birla SL Short Term Fund (G) | 7.00% | 6.13% | 7.84% |
UTI Banking & PSU Debt Fund - Reg (G) | 6.00% | 6.75% | 5.79% |
HDFC Short Term Opportunities Fund (G) | 7.07% | 5.62% | 7.54% |
Axis Banking & PSU Debt Fund (G) | 6.27% | 4.98% | 7.42% |
Estimated return from long term debt funds - Moderate risk
Scheme Name | 1 Year | 3 Years | 5 Years |
Aditya Birla SL Dynamic Bond Fund - Reg (G) | 6.75% | 6.75% | 6.34% |
UTI Dynamic Bond Fund - Reg (G) | 6.38% | 9.73% | 6.52% |
HDFC Medium Term Opportunities Fund (G) | 7.00% | 6.33% | 7.70% |
Estimated return from long term debt funds - High risk
Scheme Name | 1 Year | 3 Years | 5 Years |
UTI Credit Risk Fund - Reg (G) | 7.31% | 11.64% | -0.74% |
Kotak Medium Term Fund (G) | 5.95% | 6.29% | 6.91% |
Aditya Birla SL Medium Term Fund (G) | 7.35% | 14.06% | 8.83% |
Factors affecting mutual fund returns
Here’s a simpler explanation of what can change mutual fund returns in India:
- Performance of securities: A mutual fund invests money in securities like debt and equities. How these securities perform can really change the fund’s returns.
- Fund manager’s performance: The choices and plans of the fund manager can have a big effect on how the fund does. A good manager can handle tricky situations and keep investors’ money safe.
- Economic changes: Changes in government policy can really affect different parts of the economy. If a mutual fund is heavily invested in one sector, a good trend will help the fund make more money.
- Size of the fund: bigger the fund may have better returns. But the size of the fund does not have greater impact on the return.
- Cash flow: Money moving into and out of a mutual fund can change its performance.
- Market/ sector/ industry changes: Changes in markets, sectors, or industries can affect how your mutual fund does.
- Total Expense Ratio (TER): The TER, which includes all the costs that a fund incurs , may impact the returns.
To sum up, knowing about mutual fund returns helps you see if your investment is doing well and decide where to invest your money. Keep in mind, while higher returns sound great, they also mean more risk. So, when picking a mutual fund, think about how much risk you can handle and what you want to achieve with your investment.
Things to Consider about Mutual Funds Returns
When analysing the returns of mutual funds, several crucial factors merit attention:
- Timeframe: Take into account the period for which returns are assessed. Short-term returns may exhibit greater volatility, while long-term returns offer a more comprehensive view of the fund's performance.
- Benchmark Comparison: Compare the fund's returns against a relevant benchmark index representing similar investments. This comparison aids in determining whether the fund is surpassing or lagging behind its peers.
- Risk-Adjusted Returns: Evaluate the risk-adjusted returns of the fund. Some funds may yield higher returns but come with increased risk. Understanding the correlation between risk and returns is vital for gauging the fund's suitability based on your investment objectives and risk tolerance.
- Expense Ratio: Factor in the expense ratio of the mutual fund, reflecting the annual fees and expenses charged. Higher expense ratios can diminish overall returns and impact long-term performance.
- Dividends and Distributions: Consider any dividends or distributions received from the mutual fund, as they significantly contribute to overall returns and influence the fund's tax efficiency.
- Consistency: Seek consistent returns across various timeframes. A fund with a steady track record demonstrates stability and may prove more reliable than one with sporadic performance.
- Past Performance: While past performance doesn't guarantee future results, it offers insights into the fund manager's ability to generate returns. Examine the historical performance, mindful that future results can be shaped by evolving market conditions.
- Investment Objective: Evaluate whether the mutual fund's investment objective aligns with your financial goals and risk tolerance. Different funds cater to diverse objectives, such as growth, income, or a combination thereof.
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Frequently asked questions
How often are mutual fund returns distributed to investors?
Investors usually get mutual fund returns as dividends or capital gains. All funds need to give out their collected dividends at least once a year. Only investors who have opted for dividend plan will get dividend subject to availability of distributable surplus.
Are there any tax implications associated with mutual fund returns?
Yes, there are tax implications associated with mutual fund returns. Profits gained from investment in mutual funds are known as ‘Capital gains’. These capital gains are subject to tax. The taxation rules differ based on the type of mutual fund, such as equity mutual fund, debt mutual fund, hybrid mutual fund, etc. Dividends and capital gains are taxable in the hands of investors of mutual funds. The capital gains are taxed separately based on the holding period and the type of fund. The holding period influences the tax rate payable on your capital gains. The higher your holding period, the lesser tax you are liable to pay.
What is the average return on a mutual fund?
The average return on a mutual fund varies and depends on market conditions and the fund's investment strategy. It is crucial to review historical performance and consider factors like risk before investing.
Is a 10% return on a mutual fund good?
A 10% return on a mutual fund can be considered good, especially if it aligns with the investor's financial goals and risk tolerance. However, individual expectations and market conditions play a significant role in determining what is considered satisfactory.
What is the average ten-year return on mutual funds in India?
The average ten-year return on mutual funds in India varies across different funds and categories. Investors should assess the historical performance of specific funds they are interested in and consider their investment objectives.
Are mutual fund returns taxable?
Yes, mutual fund returns are taxable. Gains from equity-oriented funds held for over one year are subject to Long-Term Capital Gains (LTCG) tax, while gains from debt funds held for over three years attract LTCG tax. Short-term gains are taxed as per the investor's income tax slab.
Are mutual funds tax free?
While there is no specific tax-free amount for mutual fund returns, certain investments like Equity-Linked Savings Schemes (ELSS) offer tax benefits under Section 80C. Investors should consider tax implications based on the fund type and holding period.
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