There are different methods of calculating the returns of a mutual fund, each suited to different types of investments and time frames. Let's understand these methods:

Absolute Return: This is the simplest method. It is the percentage change in the value of your investment over a specific period. It does not consider the time over which this change occurred. Example: If you invested when the NAV was ₹10 and sold when it was ₹14, your absolute return would be 40%

Compound Annual Growth Rate (CAGR): This is the annualized rate of growth of an investment over a specified period, also considering the time taken. For example, if you invested when the NAV was ₹10 and sold when the NAV was ₹20 after 1.5 years, your CAGR would be 15.43% = (12/10)1/1.5

Besides Absolute Return and CAGR, in reality, investments in mutual funds happen in multiple instalments over some time. The above two methods do not account for such a scenario. To solve this, we have two more methods: 

Time Weighted Rate of Return (TWRR): This method breaks down the investment period into multiple sub-periods based on when cash inflows and outflows happened. Then calculates the absolute return for each sub-period and aggregates them together for the total investment period return. Note that the size of the cash flow is ignored in this method.

Extended Internal Rate of Return (XIRR): This method accounts for both the timing and size of each cash flow in your investment over time. It is the most comprehensive measure of the annual rate of return on an investment. It can also easily support other cash flows like dividends, interest payments, etc in the calculation to give a complete picture of the total return. 

The information contained herein does not constitute; and should not be construed as investment advice or a recommendation to buy; sell; or otherwise transact in any security or investment product or an invitation; offer or solicitation to engage in any investment activity. It is strongly recommended that you seek professional investment advice before taking any investment decision. Any investment decision that you take should be based on an assessment of your risks in consultation with your investment advisor.

To the extent that any information is regarding the past performance of securities or investment products; please note that such information is not a reliable indicator of future performance and should not be relied upon as a basis for investment decision. Past performance does not guarantee future performance and the value of investments and income from them can fall as well as rise. No investment strategy is without risk and markets influence investment performance. Investment markets and conditions can change rapidly; and investors may not get back the amount originally invested and may lose all of their investment

Prashanth Jogimutt (ARN 165858) AMFI Registered Mutual Fund Distributor

Mutual Fund Investment are subject to market risks; read all scheme related documents carefully before investing.

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