After investing money in mutual funds, every investor is inquisitive to know about the performance of the funds. Normally, every investor looks at the reports published by the fund house but there is a possibility that the published returns of the fund could be different from the returns earned by the investor. The main reason behind this could be the different time periods considered by the funds return and the investor’s return calculation period. To avoid this conflict the investor would have to calculate his portfolio returns differently. Certain different ways of representing mutual fund returns

1) Simple Absolute Return

A new investor who has just started her investments just six months back would be keen to know about the performance so, normally every investor would look at the NAV. Supposedly, her fund NAV has moved from 10/- to 12/- in the first six months, so she assumes that her fund has given an annualized return of 40% which is not the correct way of calculating returns.

The correct way is to use simple absolute return. So let’s consider,  Investment Amount = 1,00,000,  Value after six months = 1,20,000 , simple absolute method = (1,20,000 – 1,00,000)/ 1,00,000 = 20%. 

Simple Absolute Return simply tells the investor the returns in simple percentage terms in the given time period but this method can only be used when the tenure is less than one year. The only exception to this rule is in the case of liquid funds where the returns can be annualized.

2) Compounded Annualized Growth Rate (CAGR)

Supposedly, it’s been 3 years since an investor has invested his money. He looks at the portfolio and finds that his money has become 2,20,000/- from 1,00,000/- in 3 years, he assumes that his fund has given 40% annualized return, which is the correct way of calculating annualized returns.

The Compounded Annualized Growth Rate  is used to calculate the performance of a fund  year on year. So let, Investment Amount = 1,00,000, Value after 3 years = 2,20,000 , CAGR = ((2,20,000/1,00,000)^(1/3)) – 1 = 30%

This method is used when the investment tenure is more than one year. It basically is used to know the annualized returns given by the fund over the specified period of time. If an investment has given 10% annualized over 8 years, then it means that there could have been years when the returns were more than 10% and also the years when the returns were less than 10%, it doesn’t mean that the returns on investment were constantly 10% annualized over 8 years.  However, over the eight-year time horizon, the investment has given an equivalent of 10% annually. The CAGR is the most commonly accepted method of depicting fund performance.

3) XIRR

Aisha, an investor for eight years has experienced good returns, she has used her mutual funds to save for various financial goals. She withdrew some money for some personal uses after eight years of investment. The table shows how she invested her money and how she redeemed her money.

Date Amount Invested Amount Redeemed
1-Dec-07 1,00,000/-
3-Jan-09 1,20,000/-
23-Mar-12 1,00,000/-
30-Oct-15 4,00,000/-
31-Dec-16 2,50,000/-
2-Jan-18 12,00,000/-*
XIRR 20%

The two most important elements used to calculate XIRR is the date of the transaction and the value of the transaction. This method is used to calculate the performance when the cash flows are irregular or over different periods of time. When an investor has multiple cash flows, then XIRR takes into account a real-time investment. XIRR could be used to arrive at the returns given by SIP.

4) Fund return representation as per compliance requirement

It is required for an AMC to publish the following in the factsheet. The last three preceding year returns. The returns have to be compared to a benchmark.

Illustration showing how a single investment in the mutual fund would have performed since inception v/s the nifty performance. The above table is for illustration purpose only & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund. Past performance may or may not be sustained in the future.

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