There are many ways to calculate returns from mutual fund investments. Two of the most popular methods are Absolute returns and Annualised returns.
Absolute returns
Absolute return is the simple increase (or decrease) in your investment in terms of percentage. It does not take into account the time taken for this change.
So if an investment’s current market value is Rs. 5,25,000 and your invested amount was Rs. 2,75,000 then your absolute return will be: [(5,25,000-2,75,000)/2,75,000] = 90.9%
Notice how irrelevant the date of investment or date of redemption is. Ideally, you should use the absolute returns method if the tenure of your investment is less than 1 year.
For periods of more than 1 year, you need to annualise returns; which means you need to find out what the rate of return is per annum.
Annualised returns
A Compound Annual Growth Rate (CAGR) measures the rate of return over an investment period. It is a smoothened rate because it measures the growth of an investment as if it had grown at a steady rate, on an annually compounded basis.
CAGR = [(Current Value / Beginning Value) ^ (1/# of Years)]-1
How can I find the CAGR using the computer?
To calculate a CAGR, use the XIRR function in MS Excel.
8-Jan-06 |
1,00,000 |
Enter the date and the investment value |
31-Dec-12 |
2,00,000 |
Enter the current value and the current date |
XIRR formula |
10.43% |
|
Please remember to put a negative sign as the XIRR formula calculates the return on cash flows. Thus to find returns there has to be a cash inflow and cash outflow, which should be indicated with the use of positive and negative signs