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Returns Calculations in Mutual funds

Unlike Fixed deposits, returns calculator happens differently in mutual funds. In fixed deposits, one gets fixed interest. In mutual funds, the returns are simple as:

price at which you sell – price at which you buy

Now, this may look simple but now brings the uncertainty of the price at which you will sell.

Different categories have different types of returns and risk levels. Within a category as well, the returns vary based on the performance of each mutual funds scheme. That is the reason why you see different returns for different schemes.

Absolute or Point-to-Point Return

This technique helps the investors in calculating simple returns upon their initial investment. For calculating the same, the investors would need the initial as well as the ongoing or the last NAV (Net Asset Value) of the particular SIP scheme.

For calculating the absolute or point-to-point return, there is no role of the holding period.

Therefore, in case your starting NAV was like, 20 INR and after a period of three years, it has become 40 INR, then the absolute or point-to-point returns would round off to 100 percent.

For calculating your returns with this technique, you just need to apply the formula as:

Absolute return = (current NAV – initial NAV) / initial NAV x 100.

You can put this formula on an excel sheet and then you can start your calculations. You can use the formula for calculating the returns while the holding time tends to be less than one year.

Simple Annualized Return

Some people might wish to annualize their overall return that is generated while the holding period tends to be less than one year. This technique is also known as the “effective annualized yield”.

This is actually referred to as the extrapolation of the returns. This does not give the original picture. In case you wish to annualize the SIP returns, then you can use the following formula:

((1 + Absolute Rate of Return) ^ (365 / number of days)) -1.

You can put this formula into the excel sheet for calculating the returns.

The absolute return has been made compulsory by the SEBI (Securities and Exchange Board of India) to be simple annualized while the period tends to be less than one year.

CAGR (Compounded Annual Growth Rate)

When the tenure for your SIP investment tends to be more than one year, CAGR can be an easier way of calculating the returns.

This usually depicts a figure that reveals the manner in which the investment should have grown if it had been generated as the steady return. But, in reality, the expected returns might not tend to be equal every year.

This is the reason CAGR is used to represent the mean annual growth rate which tends to smoothen the volatility occurring in the returns upon a certain time period.

When you are using CAGR for calculating returns of your SIP investment, then you can make use of the formula as:

((( Ending Value / Beginning Value) ^ (1 / number of years)) – 1 * 100

Make use of these simple steps for calculating the returns on your SIP investment. Thus, you can analyze the growth of your investment in a better way.

Here is how you can start investing in mutual funds

SIP Vs Lumpsum Funds?

short-term-debt-funds-invest-in

Case 1:  You have a large amount of money: lump sum.

Let’s say you have ₹1 lakh. If you choose to invest this via SIP, you will divide this ₹1 lakh into smaller parts – let’s say ₹5000. Then every month, you’ll pay ₹5000 as SIP. For the first month, ₹5000 is invested and earns a return.

The next month, when you pay ₹5000 again, your total investment is ₹10000. But at the end of two months, only the first SIP (₹5000) will be subject to growth for 2 months.

The SIP made in the second month will have been subject to growth only for one month. And this will continue with SIP payments made every month. In the first month, ₹95000 of your money will lie idle, earning no growth. In the second month, ₹90000 will be sitting idle, and so on.

If instead, you invested lump sum, all of the ₹1 lakh will be subject to growth. Therefore, you’ll earn a more money.

Case 2: You save a small amount of money every month: SIP

Let’s assume you earn ₹30000 a month.

But after all expenditures, you are able to save ₹5000 every month. If you choose to invest using lump sum, you’ll have to wait for a while for your saving (₹5000 a month in this case) to accumulate to the desired size before you can invest.

Till the point you reach that desired size, the money saved every month is not subjected to any kind of growth.

So, the debate over SIP vs lump sum investment is flawed.

In Case 1, where you were assumed to have a large sum of money, the right way to invest would have been to opt for a lump sum investment.

Whereas in Case 2, with smaller amounts saved every month, it made sense to go for an SIP.

Special Case: Markets Overvalued

If the markets are over-valued and you are planning to invest lump sum, your investment could suffer.

There are many times when the markets are said to be over-valued. At these times, consolidation and correction is anticipated. If at this time you invest a large sum of money, it could suffer a loss in the immediate future. There are two ways to fight this problem:

#1. If you understand the markets: If you understand the markets and can sense when a market is over-valued, it is recommended you put on hold your investment till there is a correction. Alternately, you could invest in liquid funds and wait for the correction to take place.

#2. If you do not understand the markets: If you do not understand the markets and cannot tell if the markets are over-valued or not, you should take advantage of rupee cost averaging to shield you from overpaying. Invest lump sum in debt funds. Withdraw a fixed amount from this debt fund and invest as SIP in equity funds.

Debt funds are far less volatile and have relatively consistent returns. This way, your capital will keep growing at a lower but more stable rate. At the same time, you’ll be using rupee cost averaging to invest and reduce overpaying for your equity mutual fund investment.

Needless to say, people who have a good idea of the markets can employ this method for investing lump sum too.

Lump Sum:

When the markets are going on a bull run, you can make more money with a lump sum investment.

SIP:

When the markets are volatile, SIP shields you from the risks of a bear market.

10 Best Mutual Funds for Lump Sum Investments - At a Glance
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
ICICI Prudential Bluechip Equity Fund - Direct - Growth 7.4% 14.82% 12.53% 1.2% 98% Equity
(Large Cap)
Moderately High
Mirae Asset Emerging Bluechip Fund - Direct - Growth 9.88% 18.93% 21.76% 0.8% 35% Equity
(Large & Mid Cap)
Moderately High
Axis Focused 25 Fund - Direct - Growth 3.47% 18.04% 16.05% 0.74% 60% Equity
(Focused)
Moderately High
Reliance Large Cap Fund - Direct - Growth 10.26% 16.58% 13.9% 1.22% 79% Equity
(Large Cap)
Moderately High
Kotak Emerging Equity Scheme - Direct - Growth -1.1% 12.83% 18.45% 0.7% 19% Equity
(Mid Cap)
Moderately High
Tata Equity P/E Fund - Direct - Growth -2.39% 16.03% 14.67% 0.49% 26% Equity
(Value)
Moderately High
HDFC Small Cap Fund - Direct - Growth -6.81% 16.92% 16.42% 0.84% 37% Equity
(Small Cap)
Moderately High
Aditya Birla Sun Life Tax Relief 96 - Direct - Growth -1.26% 13.4% 15.63% 0.99% 1% Equity
(ELSS)
Moderately High
SBI Banking & Financial Services Fund - Direct - Growth 15.8% 22.82% NA 1.59% 218% Equity
(Sectoral/Thematic)
High
UTI Nifty Index Fund - Direct - Growth 10.51% 14.55% 10.46% 0.1% 16% Others
(Index)
Moderately High

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