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How to calculate mutual fund returns?

As an investor, you can calculate your Return on Investments (ROI), either for lump sum or SIPs in different ways. The following are some of the methods of calculating returns along with scenarios where it is applicable to use them:

Case 1: Lump sum investment for less than a year.

Method of Calculation: Absolute Return

Let’s say you made a lump sum investment of Rs. 2,75,000 on 28 May 2018 and the present value of the investment is Rs. 325000. In such a case, calculating the absolute return will give a true picture of your earnings.

Date Amount
2018/05/28 -275000
2018/12/10 325000
Absolute Return 18.18%

*Negative Values indicate cash outflows.

Absolute Return % = (Current Value - Investment Value) / Investment Value x 100

= (325000 - 275000) / 275000 * 100

= 18.18

The absolute return shows the growth of your investment without considering the investment time period. It is simply the percentage difference in the money you had before investing and the money you have now.

Case 2: Lump sum investment over multiple years.

Method of Calculation: CAGR (Compounded Annual Growth Rate)

When a lump sum investment is made for more than a year, CAGR provides the right picture of your returns. CAGR represents the consistent rate at which the investment would have grown if the investment had compounded at the same rate each year.

Check this out for more information on CAGR.

Date Amount
2018/05/23 -275000
2019/07/23 325000
Duration 425 days
CAGR 15.43%

*Negative Values indicate cash outflows.

CAGR = [(Current Value / Investment Value)^(365/Number of Days)] - 1

= [(325000/275000)^(365/425)] - 1

= 0.1543 [15.43%]

Case 3: SIP for less than a year

Method of Calculation: XIRR (Extended Internal Rate of Return)

Absolute profit to be considered for investments less than a year.

Case 4: SIP for greater than a year.

Method of Calculation: XIRR

Similar to Case 3, XIRR is also applicable when calculating the return when your SIP is for greater than one year as well.

Date Amount
2017/12/05 -10000
2018/01/05 -10000
2018/02/05 -10000
2018/03/05 -10000
2018/04/05 -10000
2018/05/05 -10000
2018/06/05 -10000
2018/07/05 -10000
2018/08/05 -10000
2018/09/05 -10000
2018/10/05 -10000
2018/11/05 -10000
2018/12/05 -10000
2019/01/05 -10000
2019/01/07 180000
XIRR 54.96%

*Negative Values indicate cash outflows.

Read more on calculation of Mutual Fund returns in detail here on Varsity.