Mutual fund returns

Assessing the returns of ones mutual fund investment has generated is not simply taking the difference between the NAV today and of the cost paid by the investor. This will not give an investor the real picture. Here’s how the returns on ones mutual fund investments can be computed.

An investor in the morning paper straight away went to the markets page, where he checked out the NAV of XYZ Mutual Fund’s scheme, which he had invested in. He was happy to see that the NAV had moved from Rs 24 to Rs 25. His cost per unit was Rs 20. That gave him profit of Rs 5 per unit. That’s a decent 25 per cent. But he is wrong because his profit is actually much lower as he has not taken into consideration the time period of investment. He has stayed invested in this scheme for 2 years. If this time period is considered, his annualized return is 12.5 per cent and not 25 per cent as he believes.
Computing the return on investment of ones mutual funds can be done in various ways.

One of the ways is called ‘absolute returns’. In this method, one ignores the time period and simply takes the difference between market value and cost as a percentage of cost. This is the way the above investor has computed his investment return at 25 per cent.
In this method, one considers the time period of investment. Here, one considers the difference between market value and cost and divides this difference by the cost, multiplied by 12 months/365 days and divides by the number of months/days one has stayed invested. In former case the computation is: 5/10 x 1 year / 2 years. When this was applied his returns worked out to 12.5 per cent.

Now, whether one takes absolute returns or annualized returns, one must not judge the performance of the mutual fund on a standalone basis. One must consider the performance vis-à-vis the fund’s competitors and the benchmark index of the fund. For instance, for above said investor the benchmark index of XYZ Mutual Fund scheme was the BSE Sensex which had given an absolute return of 60 per cent and an annualized return of 30 per cent during the same time period that he had invested in the scheme. Clearly, the scheme had under-performed its benchmark index.

Another way of assessing performance is by considering the average performance of all schemes in the category. Again in the above case, XYZ Mutual Fund scheme was equity diversified scheme. The average absolute return offered by all equity diversified schemes was 45 per cent and annualized return was 22.5 per cent during the same period as he was invested in XYZ Mutual Fund scheme. Clearly, XYZ Mutual Fund scheme had done better than the category average. Information about returns of mutual fund schemes and comparison between their benchmark indices and averages of the categories they fall under are available on the internet in websites such as, etc.

Average annualized returns in the recent past offered by equity diversified schemes for 1 year, 3 years and 5 years are 44.41 per cent, 47.14 per cent and 40.31 per cent respectively. During the 1-year, 3-year and 5-year periods, the BSE Sensex has given returns of 38.08 per cent, 45.06 per cent and 35.46 per cent respectively. Clearly, equity diversified funds have outperformed this index throughout these periods.

Don’t be simplistic while assessing the performance of ones mutual fund investments. Use smart computation strategies to judge the performance of ones investments vis-à-vis benchmarks and competitors.