New Delhi: The primary motivation behind our investment in mutual funds is to achieve returns. Nonetheless, various metrics exist for gauging these returns, creating potential confusion in determining their significance.
Absolute return quantifies the expansion of your investment as a percentage. This concept becomes clearer through a straightforward illustration. Imagine you allocated Rs 1 lakh in a mutual fund scheme. After three years, your investment's worth reaches Rs 1.4 lakhs. This valuation information is accessible through an account statement provided by the AMC or registrar entities like CAMS or Karvy.
The net profit you garnered amounts to Rs 40,000. The absolute return, expressed as a percentage, is 40%. Notably, absolute return disregards the timeframe within which this growth materialized. For instance, if your initial Rs 1 lakh investment burgeoned to Rs 1.4 lakhs over five years (as opposed to three), the absolute return would remain 40%.
Annualized return, as its name implies, gauges the yearly growth rate of your investment's value. An important facet of annualized returns is the inclusion of the compounding effect. Compounding essentially signifies gains generated on prior profits. For instance, if you invested Rs 1 lakh in a mutual fund scheme and its value appreciates to Rs 1.4 lakhs after three years, the annualized returns would tally to 11.9%.
It's noteworthy that the 11.9% annualized return is lower than the quotient of the absolute return (40%) divided by the investment period (three years). This variance is attributed to the influence of compounding. In a separate scenario, should your Rs 1 lakh investment mature to Rs 1.4 lakh over five years, the resultant annualized returns would stand at 7%.
Total return encapsulates the effective rate of return derived from an investment, encompassing both capital appreciation and dividends received. To illustrate this, envision an investment scenario where you allocated Rs 1 lakh into a mutual fund scheme at a Net Asset Value (NAV) of Rs 20. This outlay secured 5,000 units (1 lakh divided by 20). After one year, the scheme's NAV elevates to Rs 22.
Consequently, the aggregate value of your units attains Rs 1.1 lakhs (22 multiplied by 5,000). The accrued capital gains amount to Rs 10,000. During this period, assume the scheme disbursed a dividend of Rs 2 per unit.
Your total dividend payout from the Asset Management Company (AMC) becomes Rs 10,000 (Two multiplied by 5,000). Summing up, your total return comprises Rs 10,000 in capital gains and Rs 10,000 in dividends, equating to Rs 20,000. The percentage-wise total return stands at 20%.
Trailing return signifies the annualized return encompassing a specific trailing duration concluding at the present day. The trailing period is flexible and can encompass one year, two years, three years, five years, 10 years, and so forth – effectively any designated timeframe. Trailing return serves as a prominent gauge for mutual fund performance evaluation. In fact, the returns displayed on most mutual fund websites represent trailing returns.
Point-to-point returns serve as a measurement of the alteration in an asset's price between two distinct time junctures. To elucidate, a stock's point-to-point return can be computed by comparing its value on January 1, 2023, with its value on December 31, 2023.
This approach is frequently employed to juxtapose the performance of diverse assets over a specific timeframe. For instance, one could scrutinize the point-to-point returns of stocks, bonds, and cash over a five-year span.
While point-to-point returns offer a straightforward method for evaluating an asset's performance, they do possess certain limitations. Notably, they disregard the compounding impact of interest or dividends. Moreover, point-to-point returns can be deceptive if the asset's price experiences significant fluctuations during the measurement period.
Nonetheless, point-to-point returns can prove beneficial for comparing various assets' performance within a designated timeframe. Listed below are some advantages of employing point-to-point returns:
- Simplistic computation process.
- Easily comprehensible.
- Facilitate comparison of asset performance over a specific time span.
However, it is crucial to acknowledge certain drawbacks when utilizing point-to-point returns:
- Omit consideration of interest or dividend compounding.
- Prone to misinterpretation when asset prices undergo substantial oscillations during the evaluation period.
In summation, point-to-point returns provide a straightforward and comprehensible approach to gauging asset performance. Yet, exercising caution regarding their limitations is imperative prior to employing them for investment decision-making.
Rolling returns depict the annualized returns of a scheme computed over a predetermined rolling period, revisited on a daily, weekly, or monthly basis, culminating at the designated duration's closing day. This evaluation entails a comparison against either the scheme benchmark (such as Nifty, BSE – 100, BSE 200, BSE – 500, CNX – 500, BSE – Midcap, CNX – Midcap, etc.) or fund category (like large-cap funds, diversified equity funds, midcap funds, balanced funds, etc.).
The representation of rolling returns often adopts a graphical format in the form of a chart. A rolling returns chart effectively illustrates the scheme's annualized returns throughout the rolling returns period, commencing from the inception date, juxtaposed with the benchmark or category.
Despite not being extensively employed in India, rolling returns have gained widespread recognition globally as the most comprehensive gauge of a fund's performance. While trailing returns display a bias towards recent periods (as elucidated earlier), point-to-point returns pertain only to the specific timeframe under scrutiny, potentially lacking relevance for the present moment.
In contrast, rolling returns offer an unbiased assessment of a fund's absolute and relative performance across diverse timeframes. This metric serves as an invaluable tool for comprehending performance consistency and the fund manager's proficiency.