Mutual funds now are a popular investment option for us and every other day new investors are joining in. The industry’s assets under management have already increased fivefold in the last decade and the share of individual investors too have grown phenomenally and is now similar to the institutional investors.
For the average Indian investor, returns have been a major driving force for investing in mutual funds. The possibility of extra returns has lured many an investor to consider mutual funds, particularly the equity mutual funds along with the conventional options. Infact while selecting funds, disproportionate weightage is often allotted to the past returns. Returns have also dominated the agenda in portfolio reviews and are keenly tracked post purchase.
There are various types of returns and we would do well revisiting some of the commonly quoted.
Absolute Returns: Absolute returns are simply the returns generated by the scheme regardless of the amount of time invested. Also known as point-to-point returns, absolute returns do not consider the timeframe involved. If Rs10,000 invested in 1st Aug 2015 yields Rs20,000 on 31st July 2021, absolute returns is 100%.
Annualised Returns: Annualised returns calculate the returns generated by the scheme per year basis. It is the percentage change in an investment over one-year period and are often used to compare two different investments. Also known as Compounded Annual Growth Rate (CAGR), annualised returns are expressed as a percentage and are the most commonly used tool to check an investment’s return. In the above example the annualised returns (CAGR) generated by the scheme is 12%.
XIRR: While CAGR is adept at calculating the returns of single lumpsum investment it will be cumbersome using the CAGR in multiple redemptions or in regular inflows like SIP. The commonly used function to measure returns of a series of cash flows in the Internal Rate of Return (IRR). However, as the IRR function is not helpful in case of uneven cash flows, hence XIRR (Extended Internal Rate of Return) function of Microsoft Excel is more popular and widely used. This functions helps you calculate the returns of your SIPs or folios with multiple cash-flows.You might come across the XIRR column in your portfolio related statements for SIP returns but not limited to that.
We often refer to the scheme returns in our attempt to select the best schemes(s) and track them post purchase too. The “Top Performers” listed by your favourite app will bear testimony to it. However the returns we check are only one type of returns and offer limited information. There are few more types of returns which need to be considered together, if any credible inference is to be derived regarding past performance of the fund.
Trailing Returns: Trailing Returns are the scheme returns you normally come across and are quoted in the scheme factsheets or your favourite apps. Simply put they are the annualised returns that look backward for a set duration, like six months, one year, three years, five years and so on. They are the point to point returns, the reference point being today, hence can change daily. Trailing Returns listed for less than a year could either be Absolute Returns or Annualised but for periods of more than a year are always Annualised Returns. Though commonly referred the trailing returns are not necessarily the most accurate measure of a scheme’s past performance. One good year has the potential to raise the returns of previous few average years.
Calendar Returns: Calendar Returns are the absolute returns that a scheme generates in a single calendar year, i.e. from 1st January to 31st December of any year. These figures will not match the trailing returns as it simply depicts returns generated by a scheme within a particular calendar year. Calendar Returns for last few calendar years will show how the fund has tackled market volatility, a critical information.Rolling Returns: Rolling Returns also known as rolling period returns are the annualised returns of a scheme taken for specific interim periods like monthly, yearly or three-yearly and repeated till the end of the duration. If we have to calculate one month Rolling Return of an equity mutual fund as on 31st March 2021 for the period of last one year, we will consider the NAV growth commencing from 1st March 2020 to finally 1st March 2021 in all total thirteen periods and calculate the average of this sample. So we calculate the NAV growth for the period (01/03/2020 to 01/04/2020), then the period (01/04/2020 to 01/05/2020), then again (01/05/2020 to 01/06/2020) and continue till the final period (01/02/2021 to 01/03/2021). The average of these thirteen-month data is the one month rolling return for the one year period.
Some calculations consider all the one-month/30 day periods available in the financial year 2020 – 2021. If we wish we may choose to calculate such one-month trailing performance for all the one-month periods possible during this one year period. Thus, we can get multiple trailing period returns which provides us with much more consistent trailing returns than the “Trailing Returns” commonly referred to as past returns. Normally, Rolling Returns are calculated for one year, three and five year rolling of the fund since inception or for a reasonably long duration.