Mutual Funds: How can investors ascertain the returns? Here are 5 key metrics

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Mutual Funds have become increasingly popular among investors seeking to achieve financial independence and create wealth for themselves. However, navigating the myriad of mutual fund options and understanding their returns can be daunting for many. 

In this article, we’ll break down the importance of how investors can understand and ascertain returns for their mutual fund investments, while also exploring how to compare performance between multiple schemes and against benchmarks across different time periods.

Also Read: Mutual Funds: What is a step-up SIP and how does it work?

Here are some of the important metrics that investors should consider while evaluating fund performance.

1. Point-to-Point Returns or Absolute Returns: This metric measures the percentage change in investment value from the beginning to the end of a specific period. For instance, if an investment grows from 10,000 to 15,000 over three years, the point-to-point return would be 50%.

2. Compound Annual Growth Rate (CAGR): CAGR is the mean annual growth rate of an investment over a specified period of time longer than one year. It allows investors to compare the historical returns of different investments or portfolios and helps in understanding long-term growth trends. It is ideal for evaluating the performance of investments that do not involve intermediate cash flows.

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3. Extended Internal Rate of Return (XIRR): XIRR takes into account the timing and amount of each cash flow, providing a more accurate picture of an investment’s return. This makes it useful for investments with irregular cash flows, or where investors regularly invest varying amounts, such as systematic investment plans (SIPs) or do frequent withdrawals through systematic withdrawal plans (SWP).

Also Read: Mutual Funds: 7 smart SIP strategies can help you stay committed to your financial goals

4. Rolling Returns: Rolling returns measures the average annual returns over various periods, indicating the consistency of performance. This can be used by investors to evaluate how various mutual funds perform across different market cycles. By analysing rolling returns for different time frames, investors can make well informed decisions as it removes recency biases, and provides a better understanding of historical performances across market cycles.

Also Read: Mutual fund KYC status: 5 key things investors should know

In addition to comparing performance between multiple schemes, investors should also assess how their mutual fund fares against a relevant benchmark. A benchmark is a standard index that represents the mutual fund category or the overall market. Comparing a mutual fund’s performance against the benchmark provides insights into how well the fund manager has performed or not.

Understanding and ascertaining returns of mutual fund investments is essential for investors to make informed decisions. By comprehending returns, investors can evaluate the effectiveness of their investment strategy, track progress towards financial goals, and make necessary adjustments to the same.

Disclaimer: The views are not investment advice and investors should obtain their own independent advice before taking a decision to invest in any asset class or instruments.

Farhad Gadiwalla, Executive Vice President & Head – Products at UTI AMC

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Published: 07 Jun 2024, 02:47 PM IST