Performance of Mutual Fund Schemes
Three ways to express a return
Absolute (point-to-point) return = (End − Begin) ÷ Begin × 100. It ignores time and is fine only for periods under a year.
Compounded annual growth rate (CAGR) converts a multi-year holding into an annual figure: CAGR = [(End ÷ Begin)^(1/n) − 1] × 100, where n is the number of years.
XIRR is used for multiple, uneven cash flows - the correct measure for SIP and STP streams, where a simple CAGR is misleading.
Interpreting performance
Compare a fund against its benchmark and against its peer category, over a full market cycle - not just the latest year. Look at rolling returns to smooth out start-date luck, and at consistency of alpha. Remember that NAV is already net of the expense ratio, so a regular plan and its direct plan report different NAVs for identical portfolios. Dividends reduce NAV on the ex-dividend date; the return is split between NAV change and payout, so compare total return (growth NAV or dividend reinvested), not NAV alone.
Traps
- Annualising a 6-month return by simply doubling it.
- Comparing a 1-year absolute return with a 3-year CAGR as though they were like figures.
- Quoting a fund's return without stating the period or whether it is regular or direct plan.
- Survivorship bias - measuring only funds that still exist flatters the industry average.
- Assuming a fund that beat its benchmark last year will repeat it.
Worked example: ₹10,000 grows to ₹16,100 in 4 years. CAGR = [(1.61)^(1/4) − 1] × 100 ≈ (1.1265 − 1) × 100 = 12.65% per annum; the absolute return is 61% over four years.