It helps you to calculate the simple returns on your initial investment. What you need is only the initial and the current or the ending net asset value (NAV) of the scheme. In calculating the point-to-point or absolute return, the holding time does not play a role. So if your initial NAV was, say, Rs 20 and now after 3 years, it is Rs 40, the point-to-point return comes to 100 per cent!
absolute return = (current NAV - initial NAV)/ initial NAV x 100
Use this formula to calculate returns when holding period is less than 12 months .
Simple annualised return
Some may want to annualise the return generated when holding period is less than 12 months. Also referred to as effective annual yield, it is actually extrapolating the returns but not giving the true picture. If you need to annualise the returns, here's the formula:
((1 + Absolute Rate of Return) ^ (365/number of days)) - 1
Some may want to annualise the return generated when holding period is less than 12 months. Also referred to as effective annual yield, it is actually extrapolating the returns but not giving the true picture. If you need to annualise the returns, here's the formula:
((1 + Absolute Rate of Return) ^ (365/number of days)) - 1
llustration: The NAV of Rs 20 may shoot to Rs 25 in, say, 7 months, i.e., 210 days. The absolute return in this case is 25 per cent over 7 months, i.e., 0.25
So it becomes
=((1 + 0.25) ^ (365/210)) - 1
=47.38 per cent
Absolute return, therefore, as mandated by the Securities and Exchange Board of India (SEBI), is when the period is less than a year, and simple annualised return is shown when period is exactly a year.
So it becomes
=((1 + 0.25) ^ (365/210)) - 1
=47.38 per cent
Absolute return, therefore, as mandated by the Securities and Exchange Board of India (SEBI), is when the period is less than a year, and simple annualised return is shown when period is exactly a year.
Compounded annual growth rate (CAGR)
When the time period is more than a year, CAGR is a better way to depict returns. It's basically a number that shows how the investment would have grown had it generated a steady return. In reality, however, returns may not be the same each year. CAGR, therefore, represents a mean annual growth rate that smoothens out the volatility in returns over a period of time.
Let's now see how CAGR can be quickly computed using an excel file. Here, we consider CAGR of investment made in MFs.
Assuming you had invested Rs 1 lakh in an MF three years back at an NAV of Rs 20. Now, the NAV is Rs 40.
Here's the formula
=(((ending-value/beginning-value)^(1/number-of-years))-1*100
So it will be
= (((40/20)^(1/3))-1)*100
And on hitting enter, the result is:
=25.99%
When the time period is more than a year, CAGR is a better way to depict returns. It's basically a number that shows how the investment would have grown had it generated a steady return. In reality, however, returns may not be the same each year. CAGR, therefore, represents a mean annual growth rate that smoothens out the volatility in returns over a period of time.
Let's now see how CAGR can be quickly computed using an excel file. Here, we consider CAGR of investment made in MFs.
Assuming you had invested Rs 1 lakh in an MF three years back at an NAV of Rs 20. Now, the NAV is Rs 40.
Here's the formula
=(((ending-value/beginning-value)^(1/number-of-years))-1*100
So it will be
= (((40/20)^(1/3))-1)*100
And on hitting enter, the result is:
=25.99%
If the holding period is in months, use this
Formula: =(((ending-value/beginning-value)^(12/number-of-months))-1*100
= (((40/20)^(12/36))-1)*100
=25.99%
Similarly, if you know the NAV and the number of days, then use
Formula: =(((ending-value/beginning-value)^(365/number-of-days))-1*100
= (((40/20)^(365/1095))-1)*100
=25.99%
Formula: =(((ending-value/beginning-value)^(12/number-of-months))-1*100
= (((40/20)^(12/36))-1)*100
=25.99%
Similarly, if you know the NAV and the number of days, then use
Formula: =(((ending-value/beginning-value)^(365/number-of-days))-1*100
= (((40/20)^(365/1095))-1)*100
=25.99%
For calculating SIP returns, use XIRR
Cash inflows and outflows may not always be evenly matched and instead these could be at irregular intervals. For example, in a money-back plan or in a mutual fund SIP. XIRR is a function in Excel for calculating internal rate of return or annualized yield for a schedule of cash flows occurring at irregular intervals.
In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. SIP investments happen on a pre-decided date and even the amount is fixed, and depending on the NAV of the scheme on that day, you get certain number of units. Hence, you keep accumulating units from the day your SIP starts. On the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day).
Cash inflows and outflows may not always be evenly matched and instead these could be at irregular intervals. For example, in a money-back plan or in a mutual fund SIP. XIRR is a function in Excel for calculating internal rate of return or annualized yield for a schedule of cash flows occurring at irregular intervals.
In a SIP, you keep investing regularly over a long period and get back the maturity amount upon exit. SIP investments happen on a pre-decided date and even the amount is fixed, and depending on the NAV of the scheme on that day, you get certain number of units. Hence, you keep accumulating units from the day your SIP starts. On the day you exit the scheme, i.e., redeem your total units, you get the maturity amount, which is NAV (of redemption day) multiplied by total units (on redemption day).
Now, to know how much returns ones scheme has generated, you may use the XIRR (a function in excel). It's simple and one doesn't even require the NAV of any date.
No comments:
Post a Comment