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Guide to Mutual Funds

Methods Used To Evaluate The Performance Of A Mutual Fund

To evaluate a fund's performance, digging out its returns is one of the most important ways. To do that, let's understand two of the most common methods of calculating returns-

  • Absolute returns

It’s the simple increase or decrease in the rate of return without taking the change in time into consideration.

If you've invested Rs. 2,75,000 and now the investment is worth Rs. 5,25,000, your absolute return is 90.9%.

This method works well for investments held for less than a year. For longer periods, like over a year, you need to figure out the yearly return rate, which is called annualizing returns.

  • Annualised returns

The Compound Annual Growth Rate (CAGR) shows how much an investment grows on average each year as if it grew steadily every year. It smoothens out the ups and downs of growth over the investment period.

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How to calculate CAGR?

CAGR = [(Current Value / Beginning Value) ^ (1/# of Years)]-1

You can also use the XIRR function in Excel to find the same.

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