Mutual Fund Returns – Types of & Expected Average Mutual Fund Returns

Mutual fund performance can be expressed in several ways, and each metric answers a different question. Absolute returns may be useful for short holding periods, CAGR (Compound Annual Growth Rate) can help assess longer-term lump-sum investments, while XIRR is generally more relevant for SIPs involving multiple cash flows.

Understanding these differences can help investors evaluate mutual fund returns more meaningfully rather than relying on one performance number.

What Are Mutual Fund Returns?

Mutual fund returns represent the change in the value of an investment over a specified period. Depending on the scheme and investment, performance can be influenced by movements in the underlying securities, income received by the portfolio and changes in market conditions.

A scheme's Net Asset Value (NAV) represents its per-unit market value and is one of the measures through which its performance can be tracked.

Types of Mutual Fund Returns Explained

Understanding the types of return in mutual fund investing is important because no single metric is appropriate for every investment period or cash-flow pattern.

As a general approach:

• Investments held for up to one year are commonly evaluated using absolute returns.

• Investments held for more than one year are generally assessed using CAGR or compounded annualised returns.

Total Returns

Total return measures the overall change in an investment's value while accounting for relevant gains and distributions over the measurement period.

Absolute Returns

Absolute return measures the percentage gain or loss between the initial investment value and its current or redemption value without annualising the result.

Point-to-Point Returns

Point-to-point returns compare an investment's value between two selected dates.

For instance, an investor may compare the NAV on 1 January of one year with the NAV on 1 January of the next year. The result depends heavily on the chosen start and end dates.

Annualised Returns

Annualised returns express investment performance as an equivalent yearly rate, making investments held for different periods easier to compare.

For periods longer than one year, compounded annualised performance is generally more meaningful than simply dividing the total return by the number of years.

Annual Returns

Annual returns show how a scheme performed during an individual year or financial year.

Looking at annual performance separately can help an investor see whether performance has been relatively consistent or has varied substantially from year to year.

Trailing Returns

Trailing returns measure performance backwards from a specific date over a predefined period, such as one, three or five years.

A limitation is that the result depends on one particular starting and ending date. Therefore, trailing performance is often better considered alongside rolling returns.

Compounded Annual Growth Rate (CAGR)

CAGR represents the compounded annual rate at which an investment would have grown from its beginning value to its ending value over multiple years.

Rolling Returns

Rolling returns calculate performance across multiple overlapping periods rather than using only one starting date.

XIRR for SIP Investments

XIRR or Extended Internal Rate of Return, calculates an annualised return while accounting for the amount and timing of each cash flow.

What Is the Average Return on Mutual Funds?

There is no single reliable average return applicable to all mutual funds.

Equity, debt, hybrid and other mutual fund categories have different investment objectives, asset allocations and potential risk profiles. Their performance may also change across market cycles.

Mutual fund schemes are not guaranteed or assured-return products and can be affected by interest rates, government policies, economic conditions, currency movements and market volatility.

Therefore, the average mutual fund returns always depend on:

• fund category

• investment period

• market cycle

• benchmark

• level of potential risk

Similarly, there is no average ROI in mutual funds and should not be treated as a standard performance figure.

There is also no specific mutual fund average interest rate. Mutual funds do not generally pay a predetermined interest rate like a fixed-interest product; their investment outcomes depend on the performance of the underlying portfolio.

Factors That Affect Mutual Fund Returns

Several factors can influence the performance experienced by investors.

Market Conditions

Equity and bond markets move in response to economic developments, interest rates, policies, currency movements and other market factors.

Asset Allocation

The proportion invested across equity, debt or other assets affects both potential performance and potential risks.

Investment Horizon

Investment horizon affects both the investor's exposure to market cycles and the return metric used to evaluate performance.

Fund Management

For actively managed schemes, security selection, portfolio allocation and investment decisions can influence how a fund performs relative to its benchmark.

How to Calculate Mutual Fund Returns?

The appropriate calculation depends mainly on the investment structure and holding period.

Things to Consider While Evaluating Mutual Fund Returns

A high historical return by itself provides an incomplete picture.

Consider:

• whether the comparison period matches your investment horizon

• whether the fund is being compared with an appropriate benchmark

• consistency across different periods

• volatility and downside behaviour

• expense ratio and other applicable costs

• portfolio strategy and asset allocation

• the scheme's stated investment objective

• whether its potential risk level matches your capacity and financial goals

How to Evaluate Mutual Fund Performance?

Start with the return metric that fits your investment.

For a multi-year lump sum, CAGR can provide a useful starting point. For a SIP, consider XIRR. Then examine performance over different time frames instead of selecting only the period in which the fund looks strongest.

Next, compare the scheme with:

• its stated benchmark over the same period

• comparable schemes within the same category where appropriate

• its own performance across different market periods

• relevant potential risk measures

Common Myths About Mutual Fund Returns

Myth 1: A fund that performed well recently should continue doing so.

Past performance cannot guarantee future investment outcomes.

Myth 2: Every mutual fund should offer similar average returns.

Different categories follow different asset allocations, strategies and potential risk profiles.

Myth 3: CAGR means the fund earned the same return every year.

CAGR is a smoothed compounded rate; actual yearly performance may be positive or negative.

Myth 4: The fund with the highest historical return is automatically preferable.

Performance needs to be evaluated together with consistency, volatility, investment objective and suitability.

Tips to Maximise Long-Term Mutual Fund Returns

No strategy can guarantee higher mutual fund returns. However, investors can improve the quality of their investment process by:

• selecting schemes aligned with their goals and investment horizon

• maintaining appropriate diversification

• avoiding decisions based solely on short-term performance

• reviewing performance over meaningful periods

• considering costs and portfolio characteristics

• comparing like-for-like funds and benchmarks

• periodically checking whether the scheme continues to suit their financial plan

Consistent Risk-Adjusted Returns Are More Important Than Chasing the Highest Returns

The highest historical return tells investors only how much a scheme gained during a selected period. It does not tell them how much volatility or potential risk was involved in generating that performance.

A more balanced assessment considers risk-adjusted performance. It measures how effectively a scheme generated its investment outcome relative to the potential risks taken.

Evaluating Returns in the Right Context

Rather than relying on an assumed average mutual fund return, assess the scheme's objective, benchmark, consistency, costs, investment horizon and potential risks together. Mutual fund investments remain subject to market risks, and past performance should not be treated as an assurance of future investment outcomes.

Blog Disclaimer

The information herein is meant only for general reading purposes, and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data, and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

SEBI Registration No. MF/020/94/8

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.