Understanding how mutual fund returns are calculated helps investors make informed decisions and assess the potential growth of their investments. Returns are generally expressed as a percentage and indicate how much the investment has grown or may potentially grow over time.

Key components of mutual fund returns

Mutual fund return potential is influenced by several factors:

• Net asset value (NAV): The NAV represents the per-unit value of the fund’s assets. It is calculated by dividing the total value of assets minus liabilities by the number of units outstanding. Changes in NAV over time reflect the growth or decline of the investment.
• Dividends and distributions: Any income or dividends received from the fund’s underlying investments can contribute to total returns. These may be reinvested or withdrawn depending on the investor’s preference.
• Capital appreciation: The increase in the value of the fund’s assets over time contributes to potential returns.

Methods to calculate potential returns

• Absolute returns: This is the simple percentage change in the value of the investment over a specific period. It is calculated as:

Absolute return (%) = (NAV at end−NAV at start) / NAV at start × 100

• Compounded annual growth rate (CAGR): CAGR provides the annualised growth rate of the investment over a period, reflecting the effect of compounding. It is calculated as:

CAGR = (NAV at end / NAV at start) ^(1/n) − 1

Where n is the number of years the investment is held.

• Total returns for SIPs: For systematic investment plans, returns consider the timing and amount of each contribution. SIP returns are usually calculated using the internal rate of return (IRR) method.

Practical considerations

When calculating potential returns, investors should also consider fees, expenses, and taxes, as these can reduce overall growth potential. Regular monitoring of the portfolio ensures alignment with financial goals and helps in making timely adjustments if required.

Investors considering direct investment options may explore Bajaj Finserv mutual fund, which offers different fund categories with varying growth potential. Consulting a financial planner or investment advisor can provide guidance in understanding returns and structuring a suitable investment plan.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.