Average Returns on Mutual Funds – Tata Capital Moneyfy

When choosing a mutual funds scheme for investment, you want to make sure you're parking your money in the right place. After all, as Abigail Johnson puts it, "Returns matter a lot. It's our capital." But how do you know which MF scheme will bring back good returns? Well, you consider the average returns on mutual funds.

Why Check Average Returns on Funds?

The average returns on a funds scheme is a simple mathematical average of a series of returns gained over time.

Because short-term performances vary based on market fluctuations and economic conditions, it's better to consider long-term performances by reviewing the mutual funds' average returns. India alone has over 2,500 registered fund schemes, so when it comes to funds selection, consistency of performance matters a lot.

While historical or average returns cannot forecast actual future returns, they certainly give you a snapshot of how the MF performed across different market cycles.

However, at the same time, it's equally important to define a benchmark to assess the fund performance accurately. When you go looking for a funds scheme in the market, select a fund that consistently outperforms its benchmark.

Consider Category Performance

Comparing returns of two different types of funds is like comparing apples to oranges. Since there is a broad spectrum of MFs, you must decide on a benchmark to assess the performance of a fund. And one of the best ways to gauge the average rate of return on mutual funds is through category performance.

This is because it factors in the expense ratio, which is a percentage of the various charges levied by your fund house for managing the fund. It essentially gives you the value-for-money aspect of the fund. So, if the average return on a fund is 10% and the expense ratio is 1%, you earn a return of 9% from the investment. 

Let's break down the average returns based on three broad categories of MFs.

Additional Read: The SMART approach to your first financial plan

1. Debt funds

These funds invest in money market instruments like corporate bonds, debentures, government bonds, etc., with a fixed maturity date and interest rate. Thus, they typically offer steady growth and income. If you consider historical returns, debt MFs have delivered an average return of 8%-9%.

Here are some top-performing debt funds in India currently.

2. Equity funds

These types of funds usually comprise a portfolio of equities and equity-related products, managed either passively or actively. They belong to the 'high risk, high return' category. Over the historical period, the average rate of return on equity funds totals to 10-12%, sometimes even higher.   

Here are some top-performing equity funds in India currently.

3. Hybrid Funds

Hybrid funds are a mix of debt and equity-related products, giving you the best of both worlds. They usually bring you good returns while also cushioning your investment against market risks.

Types of Mutual Fund Returns

There are several types of mutual fund returns that measure returns earned from a mutual funds investment over various periods of time, including:

- Absolute returns indicate the total returns earned by the investment during a specific period, expressed as a percentage. It represents the overall profit or loss incurred from the investment, irrespective of other factors like stock market fluctuations. Absolute returns are especially useful for calculating returns from short-term investments.

- Annualised returns indicate the returns earned in a year and also include the gains from compounding interest. 

- Total returns is the total gain from a mutual fund. It is the actual rate of return of the mutual fund and includes all sources generating returns, such as interest, dividends, capital gains, etc. It reflects both the earned income and the increase in the mutual fund’s value.

- Point to point returns is the yearly return between any two specified dates. It is calculated using the start and end date of the mutual fund. Point-to-point returns help measure the performance of a mutual fund over a selected period of time.

- Compounded annual growth rate indicates the yearly return through a period that ends on the current day. It is calculated using the current day’s Net Asset Value as well as the Net Asset Value of the start date of the specified period.

- Annual return indicates the returns earned over a period spanning from January 1 to December 31 of the given year.

- Trailing return calculates the performance of a mutual fund over a specified period, similar to point-to-point returns, concluding on the current day. It can measure the returns for a specified period, such as one year or five years, or from start date of mutual fund to the present day.

- Rolling returns indicate mutual funds returns at various points in time, such as on a daily, weekly, or monthly basis. This helps to eliminate biased performance evaluation based on the returns calculated at one specific time. Rolling returns measure the average of all previous returns.

- Compound annual growth rate (CAGR) is a method for calculating mutual fund returns from investments that are held over a year. It balances out any volatility or short-term fluctuations in the fund’s Net Asset Value.

Risks Associated with Mutual Fund Return Rates

Mutual funds are an excellent investment choice for investors of all experience levels and risk appetites. However, they do come with their own risks, including:

- Market risks: Mutual fund return rates are dependent on and can change according to volatile market conditions which are affected by various factors, such as economic changes, geopolitical events, and financial instability.

- Liquidity risks: Your mutual fund may invest in low liquidity assets that can be difficult to sell during financial emergencies and can negatively affect the fund’s return rates.

- Credit risks: Some mutual funds may invest in fixed-income securities, which puts them at risk of issue default and decrease the fund return rates.

- Management risks: Mutual funds that are run by fund managers who do not have enough investing experience or who employ sub-optimal investment strategies often experience poor return rates.

How to Calculate Mutual Fund Returns

Different types of mutual funds have different formulas for calculating returns:

- Absolute returns calculate how much the investment grows in total and is calculated through the formula {(Final investment value- Initial investment value)/Initial investment amount} * 100.

- Annualised returns is the return earned each year and is calculated through the formula {(1+ Absolute rate of return) ^ (365/no. of days)} – 1.

- Total returns is the total gain from a mutual fund and is calculated through the formula {(Capital gains+ Dividends)/Total investment} * 100.

- Point-to-point returns is the annual return between two specific dates and is calculated with the help of the starting and end dates of the mutual fund.

- Trailing returns is the yearly return over a period that ends on the current day and uses the Net Asset Value of the current day and the start period. It is calculated through the formula {[(Present NAV/Initial NAC) ^ (1/number of years)] – 1} * 100.

- Annual return is the return gained between January 1 and December 31 of the specific year.

The Bottom Line

Looking for top-performing categories of funds in India? Download Tata Moneyfy's mutual fund app to compare and contrast different fund schemes before you invest. You can easily check the average mutual fund interest rate and compare past performance to make informed choices.

Set financial goals, map fund schemes by objectives, and start investing the smart way.

FAQs

What is the average ten-year return on mutual funds in India?

The average ten-year return on a mutual fund in India differs from fund to fund and are dependent on market conditions and fund investment strategy. You can look at the performance record of a specific fund to ensure that it is the right fit for you.

What is the average return on a mutual fund?

There is no determined average return for mutual funds. The average rate on a mutual fund can vary and fluctuates depending on the fund’s strategy and the market conditions.

Does mutual fund returns are taxable?

Mutual fund returns are taxable. Equity-oriented funds held for less than a year are termed as short-term capital gains and taxed according to your tax slab. Equity-oriented funds held over a year and debt fund gains are taxed as long-term capital gains.