Wealth managers believe investors should know how to differentiate between absolute and annualised returns when determining the performance of their portfolios.
There is high-decibel marketing when mutual fund schemes’ net asset values (NAV) hit landmark figures like Rs 100, Rs 1,000 or Rs 2,000 which catch investors’ attention. Some fund houses also run campaigns claiming that their scheme doubled or tripled investor wealth over a particular time frame.
Wealth managers believe investors should know how to differentiate between absolute and annualised returns when determining the performance of their portfolios.
HOW SHOULD INVESTORS LOOK AT RETURNS ON THEIR MF INVESTMENTS?
Investors who hold mutual fund units for less than a year can look at the absolute return earned by the scheme, while those holding beyond a year should look at the annualised returns to get an idea of their returns from their investments. However, these should not be looked at in isolation, but compared with the respective benchmark.
HOW ARE ABSOLUTE AND ANNUALISED RETURNS CALCULATED?
Absolute return is the point-to-point return by a mutual fund scheme. It takes into account the current NAV and the NAV at the time of purchase. The difference is then divided by the purchase price and this value, multiplied by 100, gives the absolute return percentage. Annualised return measures the average rate of return earned by a mutual fund over a specific period and it takes into account the compounding effect over the specified period. For example, if you invested Rs 10,000, which is now Rs 20,000 in five years, the absolute return of the investment is 100%, while the annualised return is 14.87%.
HOW SHOULD YOU INTERPRET ANNUALISED RETURNS ON YOUR INVESTMENTS?
The annualised return you earn from your mutual fund investment can be compared with its benchmark or other schemes in the same category. For example, during the equity market selloff over the last few months, if your large-cap fund fell just 7% while the benchmark Nifty 50 fell a little more than 10%, your scheme has fared well. However, over a five-year period, if your small-cap fund has earned you a high 15% annualised return, but the benchmark has returned 17% and several peer funds have delivered 20%, it may be time to review your scheme and take corrective action if needed.
Wealth managers believe investors should know how to differentiate between absolute and annualised returns when determining the performance of their portfolios.
HOW SHOULD INVESTORS LOOK AT RETURNS ON THEIR MF INVESTMENTS?
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HOW ARE ABSOLUTE AND ANNUALISED RETURNS CALCULATED?
Absolute return is the point-to-point return by a mutual fund scheme. It takes into account the current NAV and the NAV at the time of purchase. The difference is then divided by the purchase price and this value, multiplied by 100, gives the absolute return percentage. Annualised return measures the average rate of return earned by a mutual fund over a specific period and it takes into account the compounding effect over the specified period. For example, if you invested Rs 10,000, which is now Rs 20,000 in five years, the absolute return of the investment is 100%, while the annualised return is 14.87%.
HOW SHOULD YOU INTERPRET ANNUALISED RETURNS ON YOUR INVESTMENTS?
The annualised return you earn from your mutual fund investment can be compared with its benchmark or other schemes in the same category. For example, during the equity market selloff over the last few months, if your large-cap fund fell just 7% while the benchmark Nifty 50 fell a little more than 10%, your scheme has fared well. However, over a five-year period, if your small-cap fund has earned you a high 15% annualised return, but the benchmark has returned 17% and several peer funds have delivered 20%, it may be time to review your scheme and take corrective action if needed.
