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How do I calculate my 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)

In SIPs, you keep investing regularly over a long period and get back the maturity amount upon exit. Hence, you keep accumulating units from the day your SIP starts and the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day). 

Now, to know how much return one's scheme has generated, you may use the XIRR. However, XIRR will show a higher, distorted return for SIP investments of less than a year.

Date
Amount
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
2018/08/07
90000
XIRR
47.28%
*Negative Values indicate cash outflows.

XIRR is an excel function which can be used for calculating the yield for a schedule of cash flows occurring at different intervals. For more information on XIRR, click here.

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.