This must be obvious to anybody who thinks returns on investments that no investment should be made into a fund unless there are some promising returns and calculation of their performances done thoroughly.  In case you don’t analyze returns and performance of a fund you plan to invest in, you are clearly risking your money and making an unmindful and an unaware choice of sinking your funds.  Now in order to calculate and evaluate the funds value and performance it is important that we understand the many ways of calculating the returns on mutual funds.

Now say an investment of Rs. 1000 was made for five good years, which has grown to Rs. 1,300 now, thus making the absolute return to be Rs. 300 and the percentage growth over the initial amount invested to be 30%.  Looking at the return percentage it seems like a good return, however the time factor here has been ignored.  And as the growth has happened over a span of five years, thus this method wouldn’t be apt here, but will be fine to calculate returns for investments that happen for less than a year.  So to know the real growth on yearly basis, it would be wise to look at the compounded annualized growth rate (CAGR), also termed as annualized method of calculating returns.

The annualized return on the funds here for the span of five years, considering the fact that the gains were reinvested every year will be 5.38 %.  The formula being: CAGR = [(Current Value / Beginning Value) ^ (1/# of Years)]-1.

Another type of return calculation is year to date (YTD) return that calculates return since the beginning of the year till the date of return.  So if on March 1, 2004 the year to date return was 5 percent, it means it is the return of the period from January 1, 2004.  By looking at the returns for just three months, this helps us ascertain the progress of the fund for that year.  This is known as the trailing returns, which helps you find out the returns in the past period and lets you assess the fund’s recent performance.

All the above returns if you notice are point-to-point returns that only consider the entry and exit time NAVs.  However, to know the fund performance it is important to know how was the period in between.  Were the returns steady through all years?  Or has the fund performance improved drastically of lately?  Now the returns between two different time spans can only depict the performance in those periods and can never give the apt picture of consistent performance across time periods.  Hence in such a case, rolling returns come to your rescue, when calculating the fund performances.  For each defined interval the returns are calculated on a continuous basis, which can be days, weeks, months, quarters or even years.  So to calculate the weekly returns of a given period, all possible weekly returns are summed up and averaged.  This method of calculating returns on mutual fund investments is appropriate for short term securities for providing consistent returns.

On analyzing the rolling returns you can draw our relevant statistics that indicate the maximum returns and the minimum returns, this helps in determining the fund’s performance and also helps in assessing the best and worst period for the same as well.


Arnel Ariate is the webmaster of Money Soldiers.

Click Here to Leave a Comment Below 2 comments
Amos - February 9, 2015

I’m a big fan of index investing. I believe in the semi-strong efficient market theory. Only the top (~5%) professionals can beat the market and they help ensure prices remain fair/balanced. So I prefer to buy index funds and follow a value averaging investment approach where asset classes get re-balanced every 4 months. Right now we’re 60/40 stocks bonds due to the record level of the markets. A few years ago it was 80/20. That’s the cool thing about the value averaging strategy, you mix changes up/down over time depending on how markets perform vs expectations.Thanks for sharing and great post too.

Nick @ Millionaires Giving Money - February 9, 2015

Its always a good idea to work out the statistics before you make a decision. Whenever I have spare cash I look at the risk, APR and past performance to make an informed decision. Usually my initial decision is wrong and these statistics help me to make a better financial decision. This post is spot on, thanks for sharing.


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