Different types of mutual fund returns

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Today the mutual fund investments have been increasing quite rapidly. So, investors do a lot of research for their investment. If you plan to invest in the best mutual fund, you need to see the performance of the fund, the risk and returns of the fund, experience, and performance of the fund manager, the AUM of the fund, benchmark index, return since inception and so-on.

Along with all these parameters, you need to evaluate the different types of returns that are generated from mutual fund investments.

So, to have a clear picture of the different types of mutual fund returns, we will discuss them in details.

  • Absolute Returns

It is one of the most important returns that you must know when investing in mutual funds. During your investment time period the profit that you make is called the Absolute Returns. Lets simplify this with the help of an example. Assume that you invested Rs. 10 lakhs in a mutual fund scheme on Feb 1, 2009. And your present investment value is Rs. 40 lakhs. So, your absolute return is Rs. 30 lakhs. This particular return gives you the appreciation or depreciation of your fund over your investment tenure. So, you will be able to evaluate the amount that you have accumulated during your investment period. Also, remember that you will be able to know the absolute return after a subsequent time period has passed after the initiation of your investment.

  • Annual Returns

It is one of the easiest return of mutual fund investments. The return that is generated by a fund in a calendar year is known as Annual Returns. This return is evaluated by taking into account the first and the last NAVs of the fund for the particular year and calculating the growth in NAV in terms of %. Absolute Returns are dependent on the prevailing market condition in the relevant years and the performance of the fund each year. If you want to get an idea of how much a fund manager takes the risk to generate a handsome return, then you must have a look at the fund’s absolute return.

  •  Annualized Returns

It is one of the most popular returns of the mutual fund. The compounded annual growth rate (CAGR) of your mutual fund investment is known as Annualized Return. The growth of your investment value on an annual basis is depicted by the fund’s annualized return. The effect of compounding interest rate is taken into account when a fund ’s annualized return is evaluated. Let’s take an example to have a clear concept of the annualized return. Suppose you made a mutual fund investment of Rs. 1 lakh. After 3 years, your investment amount has grown to Rs. 1.4 lakh. So, here your absolute return is 40% but your annualized return is 11.9% as it takes into account the compounding interest rate.

If you want to invest in the best performing mutual funds, then you must keep an eye on the fund’s annualized return. As because the mutual funds with the best performance gives an annualized return of more than 15%.

  •   Total  Returns

Total Return is the actual return including the dividends and the capital gains acquired from your investment. Lets explain the total return with the help of a hypothetical example. You have invested Rs. 2 lakh and the NAV is Rs. 20. So, you are purchasing 10,000 units. After a year, the NAV has been Rs. 22 so, the value of your units will be Rs. 2.2 lakh i.e., 10,000 units*Rs. 22 per unit. The capital gain here is Rs. 20000. Now, a dividend of Rs. 2 per unit over the course of the year is declared by the fund. So, the overall dividend that is paid to the investor shall be Rs. 20,000 i.e., 10,000 units*Rs. 2 per unit. As a result, your overall acquired return shall be Rs. 20,000+ Rs. 20,000 i.e., dividend+capital gains= Rs. 40,000. So, your overall return is 40%.

  •   Point to Point Return

The annualized return generated by a fund between two specific dates or two points of time is known as Point to Point Returns. The start date and the closing date of a fund are taken into account when you evaluate the point to point return. It helps you to examine a fund ’s performance in different market conditions.

  •  Trailing Returns

The annualized return over a certain trailing period till date i.e., 1 year, 3 years, 5 years etc. is called the Trailing Return. The 1-year trailing return as on today i.e., January 20, 2019, is the return of the scheme from January 20, 2018, to January 20, 2019. Similarly, the 5-year trailing return as on today i.e., January 20, 2019, is the return of the scheme from January 20, 2014, to January 20, 2019, and so-on. With the help of trailing return, you will be able to see your fund’s performance over the different time period in a tabular format. But the trailing returns are highly influenced by the present market conditions. In a bullish market, the trailing return will be high whereas, in a bearish market, it will be low.

A very important point to note that to analyze a fund’s performance you should see the 3 years or 5-years trailing return. If you consider trailing returns for 10 or 20 years, then many things might change over such a long time period making the evaluation irrelevant. Apart from the present market condition, trailing returns are dependent on the investment style of the fund manager.

  • Rolling Returns

The annualized return of a fund for a certain investment tenure (commonly known as rolling return periods) on every day from any starting date to the present date is called the Rolling Return. It can be daily, monthly or weekly basis. A fund’s relative and absolute performance over a time period at a regular interval are given by the rolling return. A 3-year rolling return from 1/1/2011 will be the annualized return of the fund from 1/1/2011 to 1/1/2014, 2/1/2011 to 2/1/2014, 3/1/2011 to 3/1/2014 and so on up to 20/1/2016 to 20/1/2019 (present date).

The rolling return gives you the return of the fund in different market conditions. As a result, you can easily examine the fund’s return consistency.

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