Learn to Calculate Your Mutual Fund Returns

October 18, 2014 Posted by admin

New investors often get confused by the terms fund managers use. It might seem like gibberish – but with a little effort though, you can understand it. So here’s a rundown on something that investors are most interested in – mutual fund returns. After all, isn’t that the whole reason for someone investing? The returns on your investments can be calculated in different ways. With some effort, you can learn to gauge how your fund is performing at given periods of time. Read on to know more about calculating mutual fund returns.

Investing seems quite tricky, but it can be simple when you understand the underlying basics. One of the many things that investors are often confused about is the return they get from their investment. They often believe that net asset value – or NAV – is an indicator of how much return they will get. This is by no means true – NAV is simply the price at which a share is bought or sold. However, NAV can help you analyse the fund’s performance over a period of time. Generally, the calculated time is the entry date and the exit date of the fund. This method is known as the point-to-point return method. Generally, the point-to-point method is preferred for periods shorter than a year. Now, using this method, if you were to calculate the increase in NAV between one day and another, you would get the absolute return. This is the change in price – also known as profit or loss – of the NAV. In other words, you express the change in your portfolio as a percentage.

But if you would rather know the change in your fund on an annual basis, then you can check the Compounded Annual Growth Rate or CGAR. It is more commonly called the annual return. The problem with this method of calculation is that you get the average return in a year. This means that you don’t know whether there has been a dip or rise in the interim. Usually, this is counteracted by the rolling returns method. This method employs continuous calculations for specific intervals. The intervals can be days, weeks, months or years. Suppose you hold a share for two years. Each day’s change will be calculated by the point-to-point method for the entirety of the two years. The average of trading days in a year will be taken as the rolling return for one year for your portfolio. Once you have the average rolling return for your portfolio, you can compare it with the average rolling return for the entire category. This will help you understand whether or not your fund has performed up to mark.

Calculating your returns generally helps you decide whether you want to continue holding a share or whether you would be better of ridding yourself of it. If you find that these methods are too complex to use on a regular basis, then you can make use of the many mutual fund calculators available on the internet. They usually save you a lot of hassle. But keep in mind that you sh\ould occasionally cross check your results by manual calculation too.

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