Why Return Numbers Can Be Confusing
When you see “This fund gave 15% returns,” it might sound great, but what does it actually mean? Let’s break down different types of returns in simple language so you can make better investment decisions.
Absolute Returns: The Simplest Way to Understand Gains
Absolute return shows how much money you made or lost from your investment.
Simple Formula: If you invested ₹10,000 and it became ₹12,000: Absolute Return = (₹12,000 – ₹10,000) ÷ ₹10,000 × 100 = 20%
What This Means: You made ₹2,000 profit on your ₹10,000 investment.
Annualized Returns: The Fair Way to Compare
Absolute returns don’t tell you how long it took to earn that money. Annualized returns solve this problem.
Example:
- Investment A: 20% return in 1 year = 20% annual return
- Investment B: 20% return in 2 years = 9.5% annual return
Investment A is clearly better!
CAGR: The Most Important Number
CAGR (Compound Annual Growth Rate) shows the steady annual return if your money grew at the same rate each year.
Real Example: You invested ₹1,00,000 in a fund:
- After 1 year: ₹1,20,000
- After 2 years: ₹1,30,000
- After 3 years: ₹1,56,000
CAGR = 16.2% per year (even though returns varied each year)
Different Time Period Returns
1-Year Returns: Shows recent performance but can be misleading 3-Year Returns: Better indicator of consistency 5-Year Returns: Good for understanding long-term potential Since Inception: Shows performance from fund launch
Smart Tip: Don’t choose funds based only on 1-year returns. Look at 3-5 year performance.
What About Negative Returns?
Negative returns mean your investment lost money. Don’t panic immediately!
Example: Your ₹10,000 became ₹9,000 = -10% return
Why This Happens:
- Stock market went down
- Economic uncertainty
- Company-specific problems
- Normal market cycles
What to Do:
- Stay calm if you’re investing for long-term
- Don’t stop your SIP
- Consider it as buying opportunity
SIP Returns vs Lump Sum Returns
Lump Sum: You invest all money at once SIP: You invest small amounts regularly
Example Over 3 Years:
- Lump sum ₹36,000 invested in January 2021: 15% CAGR
- SIP ₹1,000 monthly for 36 months: 13% CAGR
SIP returns are usually different because you invest at different market levels.
Rolling Returns: The Complete Picture
Rolling returns show how your fund performed across different time periods.
3-Year Rolling Returns Example:
- Jan 2019 to Jan 2022: 12% CAGR
- Feb 2019 to Feb 2022: 14% CAGR
- Mar 2019 to Mar 2022: 10% CAGR
This shows fund consistency better than single period returns.
Benchmark Comparison: Are You Beating the Market?
Every mutual fund has a benchmark (comparison standard).
Example:
- Your large cap fund: 16% return
- Nifty 50 (benchmark): 14% return
- Your fund beat the market by 2%!
What If Your Fund Underperforms? If your fund consistently gives lower returns than benchmark for 2-3 years, consider switching.
Risk vs Return: The Balancing Act
Higher returns usually mean higher risk.
Risk Levels:
- Low Risk: Debt funds (6-8% returns)
- Medium Risk: Balanced funds (10-12% returns)
- High Risk: Equity funds (12-15% returns)
- Very High Risk: Small cap funds (15%+ returns but volatile)
Inflation-Adjusted Returns: Real Purchasing Power
If inflation is 6% and your fund gives 8% returns, your real return is only 2%.
Why This Matters: Your money should grow faster than inflation to increase your purchasing power.
Target Returns by Risk Level:
- Conservative investors: Inflation + 2-3%
- Moderate investors: Inflation + 4-6%
- Aggressive investors: Inflation + 6-8%
Reading Fund Fact Sheets: Key Numbers to Check
Returns Table:
- 1Y, 3Y, 5Y returns
- Compare with benchmark
- Check consistency
Risk Measures:
- Standard deviation (lower is less risky)
- Beta (closer to 1 is market-like risk)
Tax Impact on Returns
Equity Funds:
- Short-term (less than 1 year): 20% tax
- Long-term (more than 1 year): 12.5% tax above ₹1.25 lakh gain
Debt Funds: As Per Slab rate
Red Flags in Fund Returns
Warning Signs:
- Extremely high returns compared to peers
- Very inconsistent year-to-year performance
- Returns much higher than benchmark always
- New fund with limited track record
Setting Realistic Return Expectations
Historical Indian Market Returns:
- Equity funds: 12-15% long-term average
- Debt funds: 7-9% long-term average
- Hybrid funds: 9-12% long-term average
Don’t Expect:
- 25%+ returns every year
- No negative years ever
- Same returns as your neighbor’s fund
Conclusion
Understanding returns helps you make better investment decisions. Focus on long-term consistency rather than short-term high returns. Remember, good returns come to those who stay invested and remain patient
