Steps Involved To Calculate Mutual Fund Returns

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  • 08 May 2023

A mutual fund is managed by a fund manager who spreads the risk across a portfolio by investing in different asset groups and securities. The major questions that arise while analyzing mutual fund returns are:

  1. How is the investment performing and what is the level of risk that the portfolio is exposed to?

  2. If the fund focuses on a single sector, how is the performance of that sector in the market? What factors affect these sectors’ performance?

  3. What kind of management fee and expense ratio is the investor charged?

  4. How is the performance of the fund in the sense of cash inflow? Is the fund welcoming many investors?

The returns reaped by a mutual fund get reinvested into the fund and this process continues. This process of using the principal amount plus the interest to invest is known as compounding. This step of paying interest on the interest accrued helps a lot in wealth creation since this accumulates over a period of time in addition to the cycle of purchasing more units of the fund.

A SIP lets an investor buy fund units with a fixed amount on a regular weekly, monthly and quarterly intervals. An SIP can either be closed or open-ended which means it is up to the investor whether they want to keep investing in the fund till they see fit or decide a fixed period to invest. In case of an open-ended fund, there is no last instalment until the investor decides to withdraw from the fund. In a closed mutual fund scheme, the investor sets an end date beyond which the instalment would not get deducted.

This technique is often chosen over the lump sum technique since it lets you put in small amounts in order to accumulate more. It also inculcates a disciplined approach to investment alongside the major benefit of mitigating risks. This means when the market is under the weather, an SIP instalment will buy more units of the fund as compared to a time when the markets are trending upwards. This lets the investor gather more units than they would in a lumpsum investment.

A mutual fund SIP calculator helps you get a fair idea of your returns and wealth gains. It helps you understand what kind of asset classes and schemes should you invest in with the expected returns in mind.

A mutual fund SIP calculator is beneficial for investors to a great extent due to the following reasons:

  1. Mutual fund SIP calculator helps you design your investment plan faster. By using this tool, the investor can get an accurate idea of his or her returns.

  2. You can estimate your future returns which can prove to be very helpful in what instalment in how many funds will an investor have to invest.

  3. It also helps you factor the rupee cost averaging which is how many units you will be able to purchase when the prices are low.

Also Read:

Types of Demat Account

6 Things to know before investing in SIP

5 Mistakes to avoid when trading in Equity

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