What is the best way to calculate returns on mutual fund investments?

Let’s say that you have fixed a financial goal. Now you have decided to invest in a mutual fund through SIP. You may obviously want to know how your portfolio shapes up. Below are a few formulas that will help you calculate the probable returns. Here is a guide to the different ways in which you can calculate your returns on mutual fund investments

  1. Point-to-point or Absolute Returns:

This formula helps you to calculate the simple returns on your initial investment. In order to do so, you simply need to know the starting and the latest net asset value (NAV). This formula can be used to calculate returns when the holding period is less than 12 months.
You can use the following formula:
Absolute return = {(Current NAV – Initial NAV)/ Initial NAV} x 100

  1. Simple Annualized Return:

At times when the holding period is less than a year, people may wish to see what their return might be at the end of the year; this is called annualizing. You may use the following formula in excel sheet to calculate your estimated returns. For calculating a simple annualized return, you can use the following formula:
Annualized Return = (1+ Rate of Absolute Return) (365/no. of holding days) – 1

  1. Compounded Annual Growth Rate (CAGR):

CAGR is a more effective way to calculate your returns if the duration of your SIP investment is more than a year. This method shows you the growth of your investment had it generated a constant return. Realistically though, returns may or may not be the same every year. Therefore, CAGR shows a mean annual growth rate that smoothens out the volatility in returns over duration of time.
Formula: CAGR = (Ending Value/Starting Value) (1/ No. of year) – 1

  1. Total Returns:

The Point-to-Point method can be limited at times. In order to bypass those limitations, you can use the Total Returns method. This concept adds the dividends that are distributed during the holding period, to the absolute change in the NAV, and dividing it by the NAV on the starting date.
Formula: Total Return = [{Dt + (Current NAV – Initial NAV)}/ Initial NAV] x 100; where Dt is dividend received per unit.

Now that you have the formulas, you may decide where to invest your funds basis the returns that you want. If you have made up your mind, you may choose HDFC securities to start with your investment. As an experienced investor I can assure you that they are the best in the business.

Click this link to start with the investment:
https://www.hdfcsec.com/mutual-fund-investment-online

You can use the following ways to count the returns from the mutual funds.

  1. Point to point or absolute returns

You can calculate the simple returns using this method. You need to know the starting and the recent price of the net asset value (NAV). one can use the following formula where the holding does not cross a year.
Absolute return = {(Current NAV – Initial NAV)/ Initial NAV} x 100

Simple Annualized Return:

In case the holding period is less than a year and you want to know the returns at the end of the year, use the following formula.
Annualized Return = (1+ Rate of Absolute Return) (365/no. of holding days) – 1

Take the help of the excel sheet for calculations.

Compounded Annual Growth Rate (CAGR):

This is an effective method for calculating the returns when the duration of the SIP is more than 12 months. It shows the growth in a constant manner. Though the real returns may not exactly match showing that the annual growth rate neutralizes the volatility in the due course of time.
CAGR = (Ending Value/Starting Value) (1/ No. of year) – 1
Total Returns:
The Point-to-Point method has certain limitations. Hence the total returns method is useful in such scenarios. In this method, you add the dividends for the holding period to absolute change in NAV and divide it by the NAV on the start date.
Total Return = [{Dt + (Current NAV – Initial NAV)}/ Initial NAV] x 100; where Dt is dividend received per unit.

In addition to the methods discussed above, you can try the online mutual calculators provided by financial institutions like IIFL Securities. These calculators are very reliable as they provide exact details. Enter the relevant information and find the returns you can have on your investments.