It is crucial for the investor to have an idea about returns on investment prior to taking that big decision of investing into a particular mutual fund. Only if he or she is certain that the risk is worth the return at the end of the day, then the fund would persuade him or her to invest in it.
So the calculation of returns becomes an integral part of any investment. What are some of the ways in which you could calculate returns on your mutual fund investments? Read on to know!
What is the Return on a Mutual Fund Scheme?
Return on Investment (ROI) is the yield that an investment produces over a stipulated time period in percentage terms. There are different methods for calculating mutual fund returns.
The methods for calculating returns are –
- Absolute Returns,
- Simple Annualised Returns,
- CAGR (Compounded Annual Growth Rate)
- XIRR (for calculating SIP Returns).
Usually, these figures are used to show the increase and decrease in the value of an investment in that particular period.
The NAV and its appreciation are used to calculate the returns on investment. NAV is the Net Asset Value or the market value of the securities held by the scheme divided by the total number of units of the scheme on the stipulated date.
What are Point to Point Returns?
Point to Point Returns are returns for a specific period of time, be it one year, three years, or five year periods. It is calculated between two specific dates. These use historical data for a block of periods.
For point-to-point returns calculation, absolute returns are used.
Absolute Returns refers to the return that a mutual fund provides over a stipulated period of time. The main consideration of absolute or total return is the initial investment amount and the maturity amount and it does not place any importance over the tenure of the investment. It is usually calculated using the formula –
Absolute Returns (%) = (Current Value – Principal Investment) / Principal Investment * 100
One has to know the entry date and point and the end date to make this calculation.
What are the advantages of calculating Point to Point Returns?
- Enables the investor to know the returns for a specific time period.
- Helps the investor take decisions regarding a potential investment.
- It is independent of benchmarks and provides a clear picture of the fund’s performance in isolation.
- It is adjustable to equity market movements.
- It is simple and easy to calculate.
Are Point to Point returns misleading?
These are simple returns calculated from one date to another – these only indicate returns for a particular point in time and not over a period of time. They are usually influenced by what happens on the start and end date. The implication of this is that if the markets were down on the start date and there is an improvement thereafter, it might appear as if the returns are high.
Also, point-to-point returns tend to ignore all that has ensued in between the two dates in consideration. Especially in the case of long-term point-to-point returns, there is no indication of what has ensued in the interim.
Basing current investment and returns based on this figure might be misleading as the representation does not show a true picture of events.
Therefore, point-to-point returns must not be taken as a generalisation of return. Instead, rolling returns must be referred to for they give a better representation of the returns one can expect.
Conclusion
Point to point returns can be a great way to judge your investment returns between the date of investing to any date/or date of redemption, but there may be many other factors that you might want to take into effect while calculating returns on your mutual fund investment.
Frequently Asked Questions
- Are trailing returns and point to point returns the same?
These are the same in theory.
- What is the difference between point to point returns and rolling returns?
| Basis | Rolling Returns | Point to Point Returns |
| Meaning | It is used by investors to measure returns at different points in time. | It is used to measure the performance of the fund for specific periods on a date-to-date basis. |
| Calculation of intervals | Blocks of three, five, or ten-year periods at various intervals can be used for calculations. | The intervals are point-to-point and annualized. |
| Returns | It provides an idea about average returns over a period of time. | Provides an idea about the absolute returns of the fund. |
| Bias | It eliminates bias associated with returns and works on a probability basis. | These returns do not eliminate any bias. |
| Use of the measure in gauging the performance of the fund | It will give an indication of how it worked overtime at specific intervals based on performance and consistency. | It does give an indication of how the fund performed over the long run. |
- What are the time periods for which point to point returns are calculated?
These returns can also be calculated from the current date all the way back to the fund’s inception date. It can also be calculated for one year, three year, five year and ten year periods.
