In recent years mutual funds have emerged as one of the most popular avenues of investment for individuals and institutions alike. As a result of their increasing popularity, more and more players have entered into this once fledgling market and introduced a wide range of products. Though having multiple choices at your disposal might seem to be a good thing, considering the sheer number of fund houses operating in India and the number of mutual fund schemes each of them offers, it is only natural that the average individual investor gets a bit overwhelmed. There is however a freely available tool at the disposal of all and sundry that can help compare different mutual funds schemes, it is the mutual fund returns calculator sometimes also called the mutual fund calculator. But before we go into the details of these, let’s first understand what mutual fund returns actually mean from the investor’s perspective.
Mutual Fund Returns
Mutual funds as is commonly understood are investment instruments i.e. they help investors save and make their investment grow over time. At this point you might point out that there are quite a few other investment options available to an Indian investor including but not limited to PPF, VPF, fixed deposits, recurring deposits, NSC, NPS, KVP and so on. What makes mutual funds better than these time tested investment options? You might ask. The answer is actually quite simple – the potentially high returns on offer. This especially holds true in the current scenario when we are witnessing falling interest rates, which are making interest rate-based investments like PPF, fixed deposits and recurring deposits a lot less lucrative than they were previously.
In case you are wondering about the quantum of these returns, there is statistical data available to sort that argument out. The average equity mutual fund in India has provided annual returns of around 15% over the past 5 years, while hybrid and debt funds are not far behind with average returns of approximately 12% and 9% respectively during the same period. The reason why mutual funds have managed this is because they are market-linked instruments, hence when markets witness a bull run, their value increases. In fact in case of debt and money market investments, yields actually increase due to increased investments when interest rates fall. Compare that with the much lower ROI of PPF at 7.9%, fixed and recurring deposits at around 7% and so on. Also take into account the fact that inflation during the same period was around 8%, which makes the fixed-rate investments even less lucrative in retrospect. I guess that at least partly explains why mutual funds have become extremely popular as investments that can beat inflation consistently in the long term.
How Equity Mutual Funds Generate Returns
The simplest classification of mutual funds is in 3 key categories – equity mutual funds, debt mutual funds and hybrid mutual funds. The key difference among the three is based on the type of investment these hold. Equity mutual funds as the same might suggest, mainly invest in equities i.e. company shares, usually ones listed on the stock exchange. They make a profit whenever the price of shares they are invested in goes up.
Let’s take an example. Suppose an equity mutual fund invests in 100 shares of company X at Rs. 15 per share. So the total amount invested is Rs.1500. Later, when the share price of X increases to Rs.20 at a later date, the value of those shares increases to Rs. 2000. So the AUM or assets under management for the fund increases by Rs. 500 in this case, which in extension increase the NAV or Net Asset Value of the fund’s units by a proportionate amount. At this point, the mutual fund may decide to redeem these shares at the higher value and the profits may be distributed as dividend to the investors, which would bring the NAV down to the previous level or they make be reinvested in a different scheme which shows potential. Dividends may be received by an investor who has chosen to invest in the dividend option of the equity fund scheme, while in case of growth no dividend is received by the investor but capital appreciation occurs based on the increased NAV. This is done on a much larger level actual equity mutual fund schemes, but the basis remains the same. The downside of this system is the fact that predicting the market is near impossible thus the price of the shares might very well decline at a later date, which would lead to losses for the mutual fund.
Debt Mutual Fund Returns – How it Happens
Debt mutual funds work is a slightly different fashion. They invest primarily in debt securities as their name would suggest. Examples of debt securities include corporate bonds, treasury securities, debentures and various other money market instruments. The main difference between a bond and a company share is that the former does not provide the investor with a piece of the company’s ownership. Additionally, bonds and debentures are similar to fixed deposits as the company you are buying the bonds from takes your money and then pays you interest (coupon rate) on your investment, with the promise to pay back your deposit at the time the bond matures. Though some bond investments are available to individual investors, mutual funds are better suited to operate in this market because they have a much larger pile of capital at their disposal, which open up a lot more options. This is one of the ways in which a debt mutual fund makes money. The other way is through capital gains generated by rising value of these bonds as they are traded in the debt market, which operates on principles similar to a share market. Debt markets are mostly impacted by changing interest rates and this is the inherent risk of these investments. When market interest rates go down, bond prices tend to rise as they continue to provide higher yield, while rising market interest rates tend to depress bond prices as bonds become less lucrative investments.
A hybrid mutual fund invests in both debt instruments as well as equities and thus it can avail the benefits of both the equity and the debt markets. Thus a hybrid mutual fund can get capital appreciation through the stock or bond markets as well as the coupon rate provided by bonds or debentures the fund is invested in. Thus a hybrid mutual fund is less prone to inflation as compared to equities, while they provide higher ROI as compared to debt funds.
Calculating Mutual Fund Returns
In case of old school investment routes such as PPF, fixed deposits, recurring deposits, etc., the returns are pretty easy to calculate as they feature a fixed rate of interest, so compound interest calculator can easily provide you with accurate returns information. This is not the case when projecting mutual fund returns because of the inherent uncertainty of how equity and bond markets behave. Thus mutual fund returns require the use of special purpose-built calculators commonly known as mutual funds returns calculator. There are further sub types of the mutual fund calculator including but not limited to SIP calculator, lump sum calculator and retirement calculator. The following are some details of these three common types of mutual fund returns calculators.
SIP or the systematic investment plan is considered to be a popular route for making mutual fund investments without completing unbalancing your monthly budget. In practice this works similar to a recurring deposit – a fixed amount of money is deducted every month from your bank account and invested in a scheme of your choice. This is the key difference from the well known recurring deposit. In case of a mutual fund, the unit NAV varies daily hence it is possible that the number of units bought will be different when each SIP purchase is initiated.
For example if you make a SIP of Rs.500 for 12 months and the NAV when you purchase units if Rs. 5, then you would have purchased 100 units of the scheme. In the following month if the NAV increases to Rs. 10, you will only buy 50 units of the scheme and so on. The SIP calculator is a predictive mutual fund calculator that gauges the value of your mutual fund returns based on some key inputs provided by you. All you need to enter into the calculator is the SIP installment amount, the expected rate of return and the duration of the SIP to get an answer within seconds. For example an SIP of Rs. 1000 made for 12 months with an expected return of 15% will give you a final value of Rs. 13008. However do keep in mind that the results provided by an SIP calculator are estimates based on the information that has been provided and is liable to change according to market movements.
Not everyone invests small amounts at regular intervals some individuals prefer to make larger investments in one go. For such individuals, the ideal mutual fund calculator for use is the lump sum calculator. The benefit of making a lump sum investment is obviously the fact that an investor does not need to worry about changing NAV. All the units purchased through a single lump sum investment will feature the same NAV; hence it becomes much easier to calculate the mutual fund returns in this case even if you are making these calculations manually. The lump sum calculator requires 3 key data points in order to provide you with a solution – the lump sum investment amount, the duration for which you are staying invested and the approximate ROI.
For example, if you are investing Rs. 10,000 in a debt mutual fund for a period of 10 years with expected returns of 10% annually, the lump sum calculator will give the final value of your mutual fund returns as Rs. 26851. This too is an estimate based on the data you put into the mutual fund calculator and the returns may become higher or lower depending on various market factors.
Investing for retirement is usually goal based as most people plan the amount they have to save over a finite number of years in order to reach a retirement corpus that should be adequate for their golden years. Number of years the investor has in order to reach their retirement corpus target is dependent on two key factors – the current age of the investor and the age at which he/she plans to retire. Then you need to input your monthly expenses into the calculator. Moreover, you have to factor in the rate of inflation, which as discussed earlier tends to make many investments a lot less valuable at the time they mature. Then of course there is the matter of your expected returns from the investments that you currently have and are planning to make in subsequent years. Based on this information, this mutual fund calculator provides three key data to help plan future investments – monthly expenses at the time of retirement factoring in inflation, the retirement corpus required to live out your golden years and the monthly savings needed till retirement in order to meet the retirement corpus goal. For example let’s assume the following:
Current Monthly expenses = Rs. 35,000
Current Age = 35 years
Retirement Age = 60 years
Life expectancy = 80 years
Inflation Rate = 6%
Current Retirement Savings = Rs. 1.5 lakhs
Expected rate of return till retirement = 10%
On input of above data into the retirement calculator, the following will be your result:
Current monthly expenses at the time of retirement = Rs. 1.5 lakhs
Corpus required to meet your post retirement expenses = Rs. 1.57 crores
Monthly Savings required to your retirement goal = Rs. 11,723.
Of course you do have to keep in mind that these figures are all estimates and the ground reality might be quite different even a few years down the line. So a mutual fund calculator is best used as a guide on your path to making viable investments that can generate suitable returns in the short, medium or long term depending on your specific requirement.