Calculating Average Returns on Mutual Funds: Key Factors and Methods

One of the most popular options among people for planning financial growth is to invest in mutual funds. However, in order to make informed investing decisions, it is important that you calculate the average return on mutual funds, to gain an idea about the growth and performance of different mutual funds over a specific period.

Table of Content

• What Are Mutual Fund Returns?
• What Factors Impact Mutual Fund Returns
• Different Calculating Methods for Calculating Average Returns on Mutual Funds

While you can use an online mutual fund calculator for the same, it is still a good idea to know how the average return on mutual funds is calculated.

What Are Mutual Fund Returns?

Mutual fund returns are the profit or loss generated over a specific period by a mutual fund investment, expressed as a percentage. The average mutual fund percentage is a measure of a mutual fund’s performance and profitability and reflects any changes in the value of your investment. 

Returns are calculated for different timeframes. You can calculate the average annual mutual fund return or you can calculate the quarterly, monthly, or daily return percentage.

What Factors Impact Mutual Fund Returns

• Performance of the Securities in Your Fund Portfolio

Mutual funds invest in a number of securities, which can be in the form of stocks or bonds, depending on the investment objective and asset allocation of the fund. So, the performance of the mutual fund will depend on how the securities in its portfolio perform.

• Fund Manager

Fund managers manage the money of investors and invest them across various securities that are in line with the investment objective of the mutual fund. They also manage your portfolio and perform periodic reviews. So, the security selection and investment timing of your fun manager will also impact the returns.

• Economic Changes

It is crucial to consider how well a mutual fund invests in a specific industry or sector. Any policy changes that the government makes have a different impact on different parts of the economy. If there is high exposure to a particular sector, positive trends will give better returns, while a change that hurts the sector will impact fund performance negatively.

• Expense Ratio

The fee charged by a fund manager or fund house for the management and running of a mutual fund is called the expense ratio. Higher expense ratios can reduce the profitability of your mutual fund investment.

• Assets Under Management

The mutual fund’s size also affects its performance. Bigger mutual fund sizes can at times become difficult for fund managers to maintain.

Suggested Read: SIP vs. Mutual Fund: What's the Real Difference?

Direct Mutual Funds vs. Regular Mutual Funds: Which is Better?

Different Calculating Methods for Calculating Average Returns on Mutual Funds

• Absolute Return

Absolute return is a percentage that indicates the upward or downward movement of the value of your mutual fund from when it was purchased to when its units are redeemed. Absolute return does not take factors, like market performance, fluctuations, etc., into account.

It is calculated based on the initial and current Net Asset Value (NAV). The absolute return method is generally used to calculate the returns of mutual funds that have an investment tenure of less than one year. In cases where the investment tenure is more than one year, you must calculate annualised returns.

The formula to calculate absolute return is as follows:

Absolute Return = [(Current NAV - Initial NAV) / Initial NAV] X 100

• Annualised Return

This method is used to calculate the average annual mutual fund return earned in a year. This allows investors to estimate the yearly performance of their investment and how much they can expect in the form of returns.

The annualised return of a mutual fund investment is calculated using the following formula:

Annualised Return = [(1 + Absolute Return) ^ (365 / T)] - 1

Here, the Absolute Return is calculated as mentioned above – [(Current NAV - Initial NAV) / Initial NAV] X 100 – and T is the number of days for which the investment was held.

• Compounded Annual Growth Rate (CAGR)

CAGR portrays the returns earned over time more accurately, as it also takes market fluctuations into account. This is a preferrable calculation for long-term investments and reflects the average annual rate of growth that resulted in the final value, with the assumption that returns were compounded annually.

The formula for calculating CAGR is as follows:

CAGR = [{(Current NAV / Initial NAV) ^ (1 / Number of Years)} - 1] X 100

Conclusion

Apart from these methods, you can also use an online mutual funds calculator to estimate the returns of a mutual fund.

Muthoot Finance offers a range of mutual fund investment options, including liquid funds, equity-linked schemes, tax-saving schemes, debt funds, balance funds, and SIPs. Diversify your investment portfolio with Muthoot Finance and enjoy the benefits of the expertise and reliability of India’s No. 1 Most Trusted Financial Brand.