Types of Returns in Mutual Funds – Which One Do You Track Most Often?

In this article, we will walk you through the various types of returns you can encounter when investing in mutual funds, along with practical examples to make these concepts clearer.

When we invest in mutual funds, we're driven by a common goal: growing our hard-earned money. Whether you're saving for your child's education, planning a dream vacation, or securing your retirement, the returns on your investment play a crucial role in shaping your financial future. Yet, returns in mutual funds are not always straightforward, and understanding the types of returns can help you make more informed decisions. Knowing how your investments perform allows you to evaluate and optimize them over time.

Furthermore, equity is known for giving multibagger returns while mutual funds are a peaceful and long-term investing method.

In this article, we’ll walk you through the various types of returns you can encounter when investing in mutual funds, along with practical examples to make these concepts clearer.

Rolling Returns

Rolling returns measure a fund’s returns at regular intervals, which provides a more consistent view of the fund’s performance. Unlike absolute returns, rolling returns help smooth out any biases that may arise from picking specific periods.

Example:

If you want to evaluate the 3-year rolling returns of a fund from 2015 to 2020, you will calculate the return for each 3-year period, i.e., 2015-2018, 2016-2019, and 2017-2020. Rolling returns give a more balanced view of the fund’s performance over multiple time frames and avoid the risk of picking an unusually good or bad period.

Trailing Returns

Trailing returns are the returns generated by a mutual fund over a specific period, ending today. These returns help you assess how the fund has performed over 1 year, 3 years, 5 years, or even 10 years, from the current date.

Example:

Imagine you check the 5-year trailing return of a mutual fund on January 1, 2024. This return will consider the performance of the fund from January 1, 2019, to January 1, 2024. If the fund grew from Rs 1,00,000 to Rs 1,61,051 over these five years, the trailing return is 10 per cent per annum.

Trailing Return = [(Rs 1,61,051 / Rs 1,00,000) ^ (1/5)] - 1 = 10 per cent

Relative Returns

Relative returns measure the performance of a mutual fund in comparison to a benchmark index or another fund. It helps you understand whether the fund has outperformed or underperformed its peers or a standard benchmark.

Example:

Let’s assume you invest in a mutual fund, and over one year, your fund generates a return of 12 per cent, while the benchmark index (e.g., Nifty 50) returns 10 per cent. In this case, your relative return is:

Relative Return = 12 per cent - 10 per cent = 2 per cent outperformance

Relative returns are crucial for actively managed funds, where the goal is to outperform a benchmark.

Absolute Returns

Absolute return is the percentage increase or decrease in your investment over a specific period, without considering the time duration. It simply compares the ending value of your investment to the initial value.

Example:

If you invest Rs 1,00,000 in a mutual fund, and after two years, your investment grows to Rs 1,20,000, your absolute return would be 20 per cent. The calculation is straightforward:

Absolute Return = [(Rs 1,20,000 - Rs 1,00,000) / Rs 1,00,000] * 100 = 20 per cent

This type of return is useful for short-term investments or when you want to know how much your portfolio has grown in value.

Point-to-Point Returns

Point-to-point returns measure the total return between two specific dates. It captures the performance of an investment from the beginning to the end of a chosen period, considering any distributions like dividends or interest.

Example:

Suppose you invested Rs 50,000 in a mutual fund on January 1, 2022, and on January 1, 2023, the investment value grew to Rs 60,000. The point-to-point return would be:

Point-to-Point Return = [(Rs 60,000 - Rs 50,000) / Rs 50,000] * 100 = 20 per cent

This method is particularly useful when comparing the performance of different funds over the same time frame.

Let's say you have invested in two different mutual funds from different AMCs, such as HDFC AMC and Mirae Asset, for the last two years. During this period, the market performed very well, but you specifically want to see the returns from the last 25 days, where the market paused after a strong rally. In this case, this method would be helpful for you.

Annualized Returns

Annualized returns represent the average yearly return on your mutual fund over a period. It helps in understanding the compound growth rate of your investment over time, making it more accurate for long-term investments.

Example:

Let’s say you invested Rs 1,00,000 in a mutual fund, and after three years, your investment grows to Rs 1,33,100. The annualized return, in this case, is 10 per cent per annum.

The formula to calculate annualized return is:

Annualized Return = [(Final Value / Initial Value) ^ (1/number of years)] - 1

Where n is the number of years. For this example:

[(Rs 1,33,100 / Rs 1,00,000) ^ (1/3)] - 1 = 10 per cent per year

Annualized returns are useful when comparing different investments over varying periods.

CAGR (Compound Annual Growth Rate)

CAGR is a more accurate representation of your investment’s growth over time, especially for long-term investments. It shows the mean annual growth rate, assuming the profits are reinvested each year.

Example:

If you invested Rs 1,00,000 in a mutual fund and the value of your investment becomes Rs 1,46,410 after 4 years, the CAGR is calculated as follows:

CAGR = [(Rs 1,46,410 / Rs 1,00,000) ^ (1/4)] - 1 = 10 per cent per annum

CAGR smooths out the returns by providing a single rate of return over the entire period, allowing you to compare it with other investment options.

Total Returns

Total returns refer to the actual return on investment, including both capital appreciation and dividends or interest income earned over a given period. This is the most comprehensive form of return as it considers both the growth in the value of your units and the income earned from the fund.

Example:

If your mutual fund investment of Rs 1,00,000 grows to Rs 1,10,000 in one year and you also receive Rs 5,000 in dividends, your total return would be:

Total Return = [(Rs 1,10,000 - Rs 1,00,000) + Rs 5,000] / Rs 1,00,000 = 15 per cent

Total returns are important to evaluate the overall performance of income-generating funds such as dividend-paying funds.

Final Thoughts:

Understanding the different types of returns in mutual funds helps you make better investment choices. Whether you're looking for short-term gains or long-term growth, being aware of how to measure and evaluate returns will provide valuable insights into the performance of your investments. Make sure you periodically review your portfolio and don’t hesitate to consult a financial advisor to optimize your mutual fund investments based on your financial goals.

By being aware of the various ways your returns can be calculated and assessed, you can not only track your performance more accurately but also plan your future investments with greater clarity and confidence.

Whether you are investing in an index fund, Small-Cap fund, Mid-Cap fund, or Large-Cap fund, these returns will help calculate your investment returns according to different time periods.

Disclaimer: The article is for informational purposes only and not investment advice.