Understanding different types of mutual fund returns

Over the recent years, mutual funds have become a popular investment option for all investors – seasoned or first-time. The flexibility to create a portfolio aligned with risk tolerance and financial goals, coupled with the investment ease and tax benefits, have made mutual funds a wise investment choice. However, given the plethora of mutual fund schemes, it can be daunting to find a plan that best fits your requirements in terms of expected returns. To make a wise choice, assess a mutual fund scheme based on its returns over the years.

Here are different types of mutual fund returns you should know:

  1. Absolute returns:  Absolute return is the return achieved by the mutual fund scheme irrespective of the investment period. These returns look at the appreciation (gain) and depreciation (loss) in a mutual fund scheme independent of the time frame. Absolute returns do not compare against any investments or benchmarks and are unrelated to any market activity. These returns can be positive or negative and can deliver returns for a tenure lower than a year. For instance, you invested Rs. 1 lakh in mutual funds through a SIP, and in four years, the value of your investment is Rs. 1.3 lakhs. In this case, your absolute return percentage is 30%, irrespective of which year the return was achieved. Even if the scheme delivers 30% in three or five years, the absolute return will remain 30%.
  2. Annualized returns:Annualized returns measure the growth of your mutual fund scheme every year. Expressed as a percentage, annualized returns also account for compound earnings. You can use annualized returns to compare different mutual funds of varied tenures. For instance, if you see a mutual fund scheme stating 5% returns in three months, it implies that the scheme earned 5% in the three-month time frame. However, if you see a 12% annualized return in three years, it means the mutual fund scheme generated a 12% return for each of the three years.

Formula = [((Present NAV/Initial NAV value) ^ (1/number of years)) – 1] * 100

  1. Total returns: Total returns of a mutual fund scheme include the total returns accrued, comprising capital gains, interest, distributions, and dividends, over a period. Total returns provide a comprehensive picture of returns rather than just the price increase.

Formula = [(Capital Gains + Dividend + Interest, etc.)/Total investment] * 100

  1. Rolling returns:Rolling returns are annualized returns for a specific time frame. These returns assess the absolute value and the relative performance of the mutual fund scheme over a given period at regular intervals (daily, weekly or monthly). Rolling returns assume the mutual fund scheme is steadily moving forward. The different time frames allow you to evaluate the return consistency of the scheme as rolling returns consider varied market conditions. The annualized return formula can calculate rolling returns for investments longer than a year.
  2. Trailing returns:Trailing returns are annualized returns of mutual funds over a specific period ending today. For instance, assume a mutual fund NAV is Rs. 50 but was Rs. 30 two years ago, the trailing returns will be 28.8%.

Formula = (Current NAV/NAV at the beginning of the trailing period) ^ (1/trailing period) – 1

To make profitable investments, it is critical to compare mutual funds using different types of returns. The Tata Capital Moneyfy app allows you to evaluate mutual fund schemes using varied return categories, ensuring you make an informed investment choice.