The return on investment is the most important factor when choosing a Mutual Fund. There are multiple ways of calculating the returns on
Mutual Funds, such as absolute returns, annualised returns and XIRR returns etc.
What is the absolute return in Mutual Funds?
The absolute return is the percentage profit or loss incurred by a Mutual Fund over the initial investment. The
profit or loss is the difference between the present NAV (net asset value) and the initial NAV of a Mutual Fund.
On the other hand, CAGR is the average yearly rate of return for a Mutual Fund. It is calculated for a specified
period, assuming the returns compound yearly. XIRR calculates the single return rate that results in the current
total investment value when applied to each instalment and redemption. It is suitable for calculating SIP returns
accurately.
Formula to calculate absolute returns
Absolute return = (Current NAV - NAV at the time of investment) / NAV at the time of investment * 100
For a Mutual Fund with a present NAV of ₹1,200 and an initial NAV of ₹1,000,
Absolute return = (1,200-1,000)/1,000*100
= 20%
Advantages and disadvantages of calculating absolute returns
Advantages
- Simple calculation: The absolute return of a Mutual Fund is easy to compute.
- Comparison: You can compare the absolute returns of various Mutual Funds despite different
durations or investment amounts.
- Suitable for short-term investments: Absolute returns are helpful when comparing returns over a
short period, particularly less than a year.
Disadvantages
- Ignores time factor: Absolute return does not consider how long it took to generate the return.
For example, an absolute return of 10% over 1 year is much better than the same return over 5 years.
- No benchmark comparison: Absolute returns do not tell whether the fund has performed better or
worse than the market average or similar funds.
- Risk considerations: The level of risk taken to achieve those returns is not considered. A
fund with high absolute returns might be extremely risky.
Conclusion
If you are looking for a quick way to understand the returns on your Mutual Fund investments, learn how to compute
absolute returns. Although this method has many limitations, it is a simple method suitable for short-term
investments.
Also Read: How
to evaluate Mutual Fund performance?
FAQs
How do I convert absolute return to annualised return?
You can convert absolute returns to annualised using the formula -
Annualised return = (1+absolute return)^(1/n)−1
where 'n' is the number of years for which you have invested.
Which is better: Absolute return vs annual return?
Absolute return is better for short-term investments. Annualised return adjusts for time, making it better for
comparing long-term investments.
What is a good absolute return in Mutual Funds?
A good return depends on market conditions and fund type. Generally, a good annualised absolute return beats the
current inflation rate.
How do you calculate the absolute return of an SIP?
Since SIPs (systematic investment plans) involve multiple investments, use the formula - Absolute return =
(Current NAV - NAV at the time of investment)/ NAV at the time of investment * 100.
Disclaimer: This article is for information purpose only. The views expressed in this article
are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd.
and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader
for taking any financial decisions based on the contents and information. Please consult your financial advisor
before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme
related documents carefully. Axis Bank Ltd
is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s
customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C
apply.
