• HDFC securities
• 17 Jul 2018
• Knowledge Centre

Let us assume that you have taken stock of your finances and fixed a financial goal for yourself. And you have decided to invest in a mutual fund, through SIP. But you want to know how your portfolio is shaping up. What you need in this situation, is a method to calculate your returns. All you need for this is an understanding of basic mathematics, in order to apply certain formulae. This is simpler than it looks. Here is a guide to the different ways in which you can calculate your returns on mutual fund investments.

 

1. Point-to-point or Absolute Return

 

In order to calculate the simple returns on your initial investment, you simply need to know the starting NAV and the latest NAV. You can apply these to the following formula:

 

Absolute return = {(Current NAV – Initial NAV)/ Initial NAV} x 100

This formula can be used to calculate returns when the holding period is less than 12 months.

 

2. Simple Annualised Return

 

Sometimes, when the holding period is less than a year, people may wish to see what their return might be at the end of the year. This is called annualizing. For calculating a simple annualized return, you can use the following formula:

 

Annualized Return = (1+ Rate of Absolute Return)(365/no. of holding days) – 1

 

3. Compounded Annual Growth Rate

 

CAGR is a more effective way to calculate your returns if your SIP investment duration is more than a year. This method shows you the growth of your investment had it generated a constant return. Realistically though, returns may or may not be the same every year. Therefore, CAGR shows a mean annual growth rate that smoothens out the volatility in returns over a duration of time.

 

CAGR = (Ending Value/Starting Value)(1/ No. of year) – 1

 

4. Total Returns

 

The Point-to-Point method can be limited at times, and in order to bypass those limitations, you can use the Total Returns method. This concept adds the dividends that are distributed during the holding period, to the absolute change in the NAV, and dividing it by the NAV on the starting date.

 

Total Return = [{Dt + (Current NAV – Initial NAV)}/ Initial NAV] x 100

(where Dt is dividend received per unit.)

 

5. XIRR

 

And finally, while the above tools are useful for calculating lump sum investments made to mutual funds, if you choose to take the SIP route for your investments, then you can easily calculate your returns on Microsoft Excel. You can use the XIRR function in Excel for calculating the internal rate of return or annualized yield for a schedule of cash inflows at irregular intervals.

 

In order to use this function, you do not even need the NAV for any date. What you need is SIP amount, dates of SIP investments, date of redemption and the amount received upon redemption.

 

Now, follow these steps:

 

• Open Excel
• In Column A, enter the transaction dates on the left side
• In Column B, enter SIP figure (let us say X), but with a minus sign since its an outflow. Therefore, - X
• Enter redemption amount in Column B (let us say Y), against the redemption dates in Column A 
• In the box below the redemption amount, Y, type in this formula: =XIRR (B1:B7, A1:A7)* 100 and hit enter. This will show you the returns on your SIP investments.