Determining mutual fund returns doesn't require rocket science; it simply demands a grasp of fundamental mathematics and familiarity with Excel.
When it comes to investing in mutual funds, there are two primary approaches: lump-sum investments and Systematic Investment Plans (SIP). It's important to note that the methodology for calculating returns differs between these two methods.
Lumpsum Investment return calculation
Absolute Return - This is the simplest method for gauging investment performance, representing the percentage increase or decrease in the initial investment.
Absolute Return (%): [(Current Value - Initial Investment) / Initial Investment] * 100
While it offers a straightforward calculation, absolute return alone may not provide a comprehensive view of overall performance.
Annualized Return - Also referred to as CAGR (Compounded Annual Growth Rate), this method is superior for evaluating performance as it provides an annualized measure of returns.
Annualized Return (%): [(Current Value / Initial Investment)^(1/n) - 1] * 100
This measure facilitates meaningful comparisons of performance across various funds and financial products, offering a more holistic assessment of investment results.
SIP Investment return calculation
In the world of Systematic Investment Plans (SIP), investors commit to regular contributions at predefined intervals over a span of time. This distinctive feature results in varying durations for each individual investment, making the standard return calculations a bit complex.
To address this challenge, the financial industry employs a specialized metric known as 'XIRR' or 'Extended Internal Rate of Return.' This metric offers an annualized perspective on the overall investment, taking into account the diverse investment dates.
To compute the XIRR, Excel provides a convenient formula. To get started, assemble a comprehensive cashflow schedule for your investments, including the amount invested, associated dates, and eventually the current or redemption value along with their respective dates. It's essential to input all investment amounts as negatives and all redemption or received amounts as positives to ensure accurate calculations.
Understanding mutual fund returns
The performance of mutual fund returns is subject to fluctuations, driven by the market's movements from the moment you initiate your investment. In the initial stages of investing, XIRR/CAGR calculations can exhibit significant positivity or negativity, contingent upon the market's performance during that period. It's essential to understand that these initial fluctuations should not elicit excessive excitement or dismay. Over a span of 1-2 years, the returns are likely to stabilize and assume a more reasonable trajectory.
For those investing in pure equity mutual funds, it's prudent to anticipate an average return of 10%-14% over an extended investment horizon. However, it's crucial to recognize that these returns won't follow a linear path and are prone to variances.
Want to understand how much money you can accumulate by doing SIP, check out our mutual fund SIP calculator here.
DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.
SIP stands for the Systematic Investment Plan, through which you invest your funds in the mutual funds, on a regular basis, that in return rewards you with the various beneficial offers as per the company which in comparison compensate for the following.
The market ups and down affects the funds that you have invested, and if the loss is incurred then the people in terms of getting the rewards might be in the form of losses or you might get; less money than you expect to be.
The best of the plans should be chosen with the most experienced SIP broker, as he or she will help you to invest in the right plan for earning the profits in the form of the offers provided by the company.
The SIP is one of the best investment plans for the long-term goals of the future as the money is kept on increasing through the regular payment of the installments.
Start Mutual Fund SIP and as a result of the long term goal you will be rewarded as with the lump sum amount of money, and you can get whatever you want with that money, plan to buy a big thing, plan the education of your children, plan to buy a house, and plan to buy a car, after the maturity you can do whatever you want for comforting your life.
The Systematic Investment Plan is the way like do the savings schemes per month on regular basis, but it also includes the risk, and if we are ready to take that risk then our money can grow as well as we can lose enough money in the years of our SIP investments.There are many the registered brokers in the market who advise investing in the SIP, as the SIP or the Systematic Investment Plan.
