Different Types of Mutual Fund Returns: From CAGR to XIRR

You must have read those flashy lines; this mutual fund has delivered returns of over 50% in the past 5 years. Sounds fascinating, right? However, such figures can sometimes be misleading if the underlying calculations and context are not clearly understood. As an active investor, you invest in various schemes, expecting multifold/higher returns.

But there are numerous types of returns in the realm of mutual funds, which you should not ignore. In this article, we have covered different types of mutual fund returns that can help you make an informed decision.

Absolute Returns

Absolute return implies the total gains received over a specified period of time. These returns are generally calculated for mutual funds when the tenure is less than a year and are fairly easy to calculate. If the tenure is more than a year, you will need to calculate annualised returns.

Absolute Returns: (Ending Value- Beginning Value) / Beginning Value X 100 Let us understand this with an example.

Mr Sam invested ₹1,00,000 in a mutual fund, which has grown to ₹1,10,000 after a year. ₹1,10,000 - ₹1,00,00 / ₹1,00,00 X 100 = 10%

This means that Mr Sam has earned 10% absolute returns from this investment. Absolute return is simple to understand, but not ideal for comparing investments over different timeframes.

Annualised Returns (CAGR)

Annualised returns, or Compounded Annual Growth Rate (CAGR) is calculated when the tenure is more than a year.

CAGR=(Ending Value/ Beginning Value​)^1/n−1 Where n denotes the number of years

• Investment= ₹10,000
• Value After 3 Years: ₹13,000 (₹13,000/ ₹10,000)^⅓-1= 9.14% CAGR is best for long-term investments and comparing funds across different time horizons.

Rolling Returns

Rolling returns give a comprehensive view of a fund's performance over different periods, daily, weekly, or monthly. This metrics evaluates the scheme's absolute and relative performance at regular intervals. For a 3-year rolling return:

• Calculate returns from 2018–2021
• Then 2019–2022
• Then 2020–2023, and so on If returns are:
• 12%, 10%, 14%, 11%

Average rolling return = 11.75%

Total Returns

The total returns represent the actual returns earned from the investment in the mutual fund, which include other gains such as dividends, capital gains, and interest accrued over the period.

Total Return = (Ending Value + Income − Beginning Value) / Beginning Value​×100

• Investment = ₹10,000
• Value = ₹11,500
• Dividends received = ₹500 (₹11,500+ ₹500− ₹10,000) / ₹10,000×100 = 20%

Extended Internal Rate of Return (XIRR)

XIRR is a technique used to measure the return on investments when there are multiple inflows and outflows. Unlike the simple return method, it considers both the timing and the size of each cash flow, providing a more accurate reflection of the actual performance. It can be complex to measure returns on investment via Systematic Investment Plans (SIPs), since each instalment remains invested for a different duration. Conventional methods often fail to capture variations effectively. XIRR can effectively deal with the variation by factoring in all cash flows and their respective dates. To calculate SIP returns using XIRR, you need the following:

• SIP investment amounts
• Dates of each SIP instalment
• Redemption date
• Redemption amount You can use Excel to calculate XIRR with the following formula: XIRR = XIRR(Values, Dates, Guess)

Trailing Returns

Trailing returns indicate the annualised performance of a mutual fund over a fixed period ending on the current date. This method is useful for measuring how a fund has performed in the past. You can calculate the trailing return by taking today’s date as the end point and comparing it with the corresponding date in the past, such as 1, 3, 5, or 10 years ago.

As per SEBI guidelines, mutual fund performance must be disclosed in a standardised and transparent manner based on NAV (Net Asset Value), ensuring consistency in return calculations across schemes. Trailing returns are derived using NAV-based reporting standards, which helps investors compare fund performance on a like-to-like basis over defined time periods.

Trailing Return = (Current NAV / NAV at the beginning of the trailing period) 1/n – 1

where n = trailing period Let us understand this with an example: If today is 2026 and a fund’s NAV

• May 2021 = ₹20
• May 2026 = ₹40

5-year trailing return (CAGR): (40/20)^(⅕)-1= 14.9%

Point to Point Returns

Point-to-Point returns indicate the annualised return earned by a mutual fund scheme between two specific dates. To calculate point-to-point return, you simply take the NAV at the beginning and at the chosen time frame and compute returns based on these values.

Point- to- Point Returns = (NAV at End Date/NAV at Start Date)/ 1/n -1 Here is a quick example:

• NAV on Jan 1, 2022 = ₹50
• NAV on Jan 1, 2024 = ₹65

(₹65 - ₹50)^(½)-1= 14.02%

Guide to Choosing the Right Return Metric for Retail Investors

FAQ

What are mutual fund return types?

Mutual fund returns include absolute, CAGR, XIRR, rolling, and trailing returns.

Why is CAGR important for investors?

CAGR shows annualised growth, helping compare long-term investment performance accurately.

When should XIRR be used?

XIRR is used for SIPs or investments with multiple irregular cash flows.

What do rolling returns indicate?

Rolling returns show consistency of performance across different time periods.

Why are absolute returns limited?

Absolute returns ignore time factor, making long-term comparison inaccurate.

What is trailing return used for?

Trailing returns measure fund performance over fixed periods ending on current date.

Why use multiple return metrics?

Using multiple metrics provides a clearer, more accurate investment performance picture.