Types of Returns in Mutual Funds: CAGR, XIRR, Rolling Returns

Ever wondered what 12% returns on mutual funds mean?  Returns on mutual funds depend on capital appreciation, compounding, investment tenure, dividend payouts, and more. Therefore, that 12% holds more meaning than you think.  In this article, we will explore all the different types of returns on your mutual fund investment with an example. 

Types of Returns in Mutual Funds

1. Annualized Returns aka CAGR (Compounded Annual Growth Rate)

As the name suggests, CAGR indicates the returns earned by investors annually including the effect of compounding. It is calculated as- Annualized Returns (CAGR) = [((Current NAV / Purchase NAV) ^ (1/number of years)) – 1]*100 Let’s say, you invested INR 1,00,000 in a mutual fund with NAV of INR 100. 
  • If the NAV increased to 110 in one year, the CAGR would be = [((110/100)^(1/1))-1]*100 = 10%
  • If the NAV increased to 115 in two years, the CAGR would be = [((115/100)^(1/2))-1]*100 = 7.24%
  • If the NAV increased to 130 in three years, the CAGR would be = [((130/100)^(1/3))-1]*100 = 9.13%
  • And so on…
Tip: CAGR is a useful measure to compare the returns on two mutual funds over a specific period of time. 

2. Absolute Returns

Absolute returns are the percentage growth/decline in a mutual fund between any two points. The duration could be two months, a couple of years, or two and a half years, the percentage will show the growth/decline in your total assets.  To put it simply, these are the non-annualized returns over a specific tenure.  The formula to calculate absolute returns is- Absolute Returns = [(Final investment value-Initial investment value)/Initial value]*100 Your investment of 1,00,000 increased to 1,50,000 at any given point; The Absolute Returns would be= [(150000-100000)/100000)]*100 = 50%

3. Extended Internal Rate of Return(XIRR)

The annualized returns (CAGR) formula works only for the lumpsum or one-time investment. But in case of multiple regular/irregular cash in-flows/out-flows, the calculation will change. One such scenario is the SIP.  Let’s say you start a SIP of INR 10000 on the 3rd of every month for 12 months, so your total investment will be 120000. The first 10000 that you invest will compound over 12 months. The next month’s installment of 10000 will compound over 11 months and so on. The XIRR formula captures the time each investment has spent in the market and calculates the returns accordingly.  Assume that your 120000 became 135000 on the 13th month. Now, to calculate the returns, you will have to use the XIRR formula.  You can use Google Sheets or Microsoft Excel to use the inbuilt XIRR formula = XIRR(values, dates, [guess]). The guess returns can be kept blank, in which case, the formula will by default assume 10%. The negative sign in front of each investment indicates cash outflow.  Your monthly investment amount and dates could vary. In such cases, the XIRR formula gives the accurate calculation of returns.

4. Trailing Returns aka Point-to-Point Returns

Trailing returns indicate the returns earned during a specific horizon. Here, you can choose the two points between which you want to calculate the returns. For example, the NAV of a fund on 1 January 2021 was 100 which became 145 on 1 January 2023. The Trailing Returns would be= [(Current NAV/NAV at the start of the trailing period)^(1/Trailing period in years) -1] x 100 Trailing returns =[(145/100)^(½) - 1] x 100 = 20.41%
You may also like to read- Mutual Fund Factsheet: How to Read The Technical Aspects

5. Rolling Returns

Rolling returns calculate returns on your investment for a particular period on a continuous basis. If you calculate trailing returns on a daily, monthly or quarterly basis, you’ll get the rolling returns. Let’s simplify it. For example, you want to calculate 2-year rolling returns on a mutual fund over the 6-year period, say between 2018 and 2023.  Now, if you choose to calculate the trailing returns on a daily basis, you will have to calculate the trailing returns of each day between 2018 and 2023 in sets of 2 years. I.e. 1 Jan 2018 to 1 Jan 2020, 2 Jan 2018 to 2 Jan 2020 and so on.  Repeat the same by calculating the daily trailing returns between 2019 and 2021, 2020 and 2022, 2021 and 2023.  Rolling returns gives you the range of returns the fund has earned over the year in a specific duration. So, if you are planning to invest in a fund for 2 years, the above data will give you an idea of the returns you can expect for that duration. Rolling returns provide accurate insights as they are not biased towards any investment period. This data is more valuable to understand the fund’s performance. 

6. Total Returns

Total returns are the overall gains on a mutual fund including the capital appreciation, interest earned, and dividends. Let’s say you bought 1000 units of mutual fund with NAV 100 by investing 1,00,000. You also received a dividend of INR 10 per share, which would be 10000. After two years, if you sold the mutual fund at a unit price of 120, your capital gains would be (120-100)*1000= 20,000. Your total returns = [(Capital Gains + Dividend)/Total Investment]*100 = [(20000+10000)/100000]*100 = 30%.

Final Words

A mutual fund factsheet usually has all the data you need to understand the performance. Numbers can be confusing but never vague.  You can make your investment decisions by trusting the numbers. Next time you analyze two mutual funds, make sure you have this blog in handy. You can always reach out to VNN Wealth for more guidance on investments. Take a look at our Instagram @vnnwealth for more insights.