Smart Tip: Understanding returns on investments
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For investors, returns are the key indicators of their investment performance. But how many of us really understand the returns and their underlying purpose?
In mutual funds, NAV is the basic element used in calculating the returns because it keeps varying from one point of time to other.
Thus, the purchase and sale value of investment is derived by multiplying the units purchased with NAV for respective period i.e. purchase date and sale date. For a layman, surplus earned over and above the principal is often termed as returns.
Returns are often termed in value and percentage change. For instance, investment of Rs 10,000 appreciates to Rs 15,000 during the term of three years of value. It means that the principal has appreciated by Rs 5,000, while in terms of percentage change, it is 50 per cent appreciation. But can we term this percentage change as the only method to gauge the performance of mutual fund investments. No.
Calculating investment performance
Absolute Returns : Absolute returns are very easy to calculate as it measures the value of investment at one point of time with other. This is the most common method to interpret the investment performance. It is generally used to measure the performance of mutual funds with high equity exposure, whose NAV (Net Asset Value) fluctuates from time to time.
If fund is purchased at Rs 10 per unit and after three years, if NAV appreciates to Rs 18 per unit, here the absolute returns is 80 per cent.
Simple annualised returns: This is just an extension to absolute returns. It is an average annual return on investments over the period of time. The simple annualised return is used for those funds, whose NAV is less volatile or fluctuates less frequently. In mutual fund industry, simple annualised returns are used for debt, liquid and short-term funds for a period less than year, as there NAV is less volatile.