How Are Mutual Fund Returns Calculated?

If you've started your mutual fund investment journey, one of the most important things to understand is how your returns are calculated. While mutual funds are known for being a convenient and diversified investment option, the return calculation can sometimes feel confusing—especially for beginners.

In this blog, we’ll break down mutual fund return calculation in the simplest way possible, covering everything from NAV to SIPs, dividends, and taxes.

What is NAV in Mutual Funds?

The Net Asset Value (NAV) is the price of one unit of a mutual fund. It is calculated daily based on the current market value of the fund’s assets minus liabilities. NAV is crucial because your mutual fund returns are based on how much the NAV increases over time.

Example: If you buy units at an NAV of ₹100 and later it becomes ₹120, your investment has appreciated.

The Basic Formula to Calculate Mutual Fund Returns

To calculate your returns, use this simple formula:

Return (%) = [(Current NAV – Purchase NAV) / Purchase NAV] x 100

This gives you a straightforward percentage gain (or loss) on your investment.

A Real-Life Example

Let’s say you invested in a mutual fund when the NAV was ₹100. After one year, the NAV grows to ₹120.

Return = [(120 – 100) / 100] x 100 = 20%
This means you’ve earned a 20% return on your investment, not considering other elements like dividends or taxes.

What About Dividends?

Some mutual funds also pay dividends from the earnings they generate. These are either paid out to you or reinvested in the fund. If you choose dividend reinvestment, your returns increase due to compounding. If you opt for dividend payout, it adds to your income.

Always factor in dividends when calculating total returns.

How Returns Are Calculated in SIPs

If you're investing through a Systematic Investment Plan (SIP), you're buying units at different NAVs each month. Since the purchase price varies, the basic return formula won’t work.

Instead, you use XIRR (Extended Internal Rate of Return) – a method that accurately calculates returns for irregular cash flows like SIPs.

Most mutual fund platforms and apps automatically show you your XIRR, so you don’t need to calculate it manually.

Impact of Taxes on Your Returns

Your mutual fund returns can be subject to capital gains tax. Here's how it works:

• Equity Funds:
  • Short-term (less than 1 year): 15% tax
  • Long-term (more than 1 year): 10% tax on gains above ₹1 lakh/year
• Debt Funds: Taxed at slab rates, regardless of holding period

Always plan your withdrawals keeping tax implications in mind.

Don’t Forget About Costs

To understand net returns, you must consider these expenses:

• Expense Ratio: Management and operational costs charged by the fund
• Exit Load: A small fee if you redeem units within a certain period

Even a 1% expense ratio can make a significant difference over time.

Key Takeaway

Mutual fund returns = (NAV growth + Dividends − Fees − Taxes)
SIP returns? Use XIRR
Stay long for compounding magic.
Track regularly. Start early. Grow steadily.