Mutual fund returns can be calculated using various methods depending on the investment type and duration. Here are the most commonly used methods:
1. Absolute Return (Best for short-term investments)
This method calculates the total return earned on an investment over a period without considering time.
Formula:
Absolute Return (%) = [(Final Value – Initial Investment) / Initial Investment] × 100
2. Annualized Return (CAGR - Compound Annual Growth Rate) (Best for long-term investments)
CAGR shows the constant annual growth rate of an investment over multiple years.
Formula:
CAGR (%) = [(Final Value / Initial Value)^(1 / Number of Years) - 1] × 100
3. XIRR (Extended Internal Rate of Return) for SIPs
Since SIP investments happen at different intervals, XIRR is used to calculate the accurate return by considering multiple cash flows and their dates.
Formula:
XIRR is calculated using spreadsheet functions like Excel’s XIRR() function, where you input all cash flows (investments and withdrawals) along with their respective dates.
4. Rolling Return (Best for analyzing consistency)
Rolling return helps measure a fund's performance across different time frames, providing insights into its consistency.
Each method provides different insights—absolute return is best for short-term analysis, CAGR is useful for long-term growth evaluation, and XIRR is ideal for SIP-based investments.
Mutual fund returns can be calculated using various methods depending on the investment type and duration. Here are the most commonly used methods:
1. Absolute Return (Best for short-term investments)
This method calculates the total return earned on an investment over a period without considering time.
Formula:
Absolute Return (%) = [(Final Value – Initial Investment) / Initial Investment] × 100
2. Annualized Return (CAGR - Compound Annual Growth Rate) (Best for long-term investments)
CAGR shows the constant annual growth rate of an investment over multiple years.
Formula:
CAGR (%) = [(Final Value / Initial Value)^(1 / Number of Years) - 1] × 100
3. XIRR (Extended Internal Rate of Return) for SIPs
Since SIP investments happen at different intervals, XIRR is used to calculate the accurate return by considering multiple cash flows and their dates.
Formula:
XIRR is calculated using spreadsheet functions like Excel’s XIRR() function, where you input all cash flows (investments and withdrawals) along with their respective dates.
4. Rolling Return (Best for analyzing consistency)
Rolling return helps measure a fund's performance across different time frames, providing insights into its consistency.
Each method provides different insights—absolute return is best for short-term analysis, CAGR is useful for long-term growth evaluation, and XIRR is ideal for SIP-based investments.
