When it comes to building wealth over time, mutual funds are one of the most popular and practical investment options in India. But a common question many new investors ask is, “What kind of returns can I expect from a mutual fund?”
Whether you’re starting with a small SIP or making a lump sum investment, understanding mutual fund returns is key to making smart financial decisions. Mutual funds often deliver better returns than traditional investment options, such as fixed deposits or savings accounts. On average, mutual funds in India have provided annual returns of 10% to 15%, depending on the type of fund and market performance. Equity mutual funds, in particular, have shown strong growth over recent years, driven by increasing investor participation and long-term market trends.
In this blog, we’ll break down everything you need to know from how mutual fund returns are calculated, to the average rate of return on mutual funds, and tips to identify good returns mutual funds that align with your financial goals.
Mutual fund returns indicate the profit or loss generated from your investment in a mutual fund over a specific period. These returns are typically expressed as a percentage or monetary value. They are calculated based on the change in the fund's Net Asset Value (NAV) along with any dividends or income distributions received.
In simple terms, it shows how much your money has grown or declined during the time you stayed invested. The aim is to earn higher returns compared to traditional savings or fixed deposit options, making mutual funds a smart choice for long-term financial growth.
The average returns in mutual funds depend on several factors, including the fund category, market performance, investment horizon, and risk level. Unlike fixed-income products, the interest rate is not predefined, as mutual funds are market-linked investments. However, based on historical data, we can get a fair idea of how different types of funds have performed on average.
|
Type of Mutual Fund |
Investment Focus |
Average Annual Return (5–10 Years) |
|
Equity Funds |
Stocks/Equity shares |
10% – 15% |
|
Bonds, Govt. Securities |
6% – 9% |
|
|
Hybrid Funds |
Mix of equity and debt |
8% – 12% |
|
Liquid Funds |
Money market instruments |
3% – 5% |
Note: These are historical averages and should not be considered guaranteed returns. Actual performance may vary depending on market trends and fund-specific factors.
Mutual funds are classified into various categories based on where they invest. Each type comes with its return potential, risk level, and ideal investment horizon. Here’s a quick overview of the primary mutual fund types and the average returns in mutual funds you can expect:
1. Equity Mutual Funds (High Returns, High Risk)
These funds invest in stocks of companies across various sectors. Historically, equity mutual funds have delivered average annual returns of 10% to 15%, making them one of the best options for long-term wealth creation. However, they are more volatile and may fluctuate in the short term.
Best for: Long-term goals, such as retirement, higher education, or wealth building.
2. Debt Mutual Funds (Stable Returns, Low Risk)
Debt funds invest in government bonds, corporate debt, and other fixed-income instruments. They typically offer annual returns of 6% to 9%. These funds are less volatile and are suitable for conservative investors.
Best for: Short- to medium-term financial goals and capital preservation.
3. Hybrid Mutual Funds (Balanced Returns, Moderate Risk)
Hybrid funds invest in a mix of equity and debt, offering a balance between risk and return. Depending on the allocation, returns generally fall between 8% to 12%. They are ideal for investors looking for moderate risk with decent growth potential.
Best for: First-time investors or those seeking a balanced investment strategy.
4. Liquid Funds (Low Returns, Low Risk)
Liquid mutual funds invest in short-term instruments, such as treasury bills and commercial paper. These funds offer returns of around 3% to 5%, better than savings accounts, with low risk and high liquidity.
Best for: Emergency funds or parking surplus cash for short periods.
Mutual fund returns can be measured in different ways, and each method highlights a unique aspect of your investment’s performance. From absolute to rolling returns, understanding these types helps you evaluate a fund’s consistency, growth, and overall returns more effectively. Here’s a simple explanation of the key types of mutual fund returns:
1. Absolute Return: Absolute Return indicates the gain or loss of your investment over a specific period, regardless of the time duration. It’s best used for short-term investments (less than a year).
Example: If you invested ₹1,00,000 and it grew to ₹1,20,000, your absolute Return is 20%.
2. Annualised Return (CAGR): The Compound Annual Growth Rate (CAGR) tells you the average yearly growth of your investment over a multi-year period. It helps compare different funds with varying time frames and provides a clearer picture of long-term performance.
Useful for: Long-term, lump-sum investments held over multiple years.
3. Total Return: Total Return includes both capital gains (NAV appreciation) and any income received through dividends or interest. It provides a comprehensive view of the returns your mutual fund has generated during the investment period.
Best for: Investors who have opted for dividend-paying funds or growth plus income strategies.
4. Point-to-Point Return: This type of return measures performance between two fixed dates, such as January 1, 2020, and January 1, 2023. It gives a snapshot of how a fund performed during that specific period.
Helpful for: Reviewing past performance over 1-year, 3-year, or 5-year timelines.
5. Trailing Return: Trailing returns show the average annual Return over recent time frames, such as the past 1, 3, or 5 years, up to the current date. These are commonly used in mutual fund comparisons on investment platforms.
Used for: Comparing similar mutual funds over the exact timeframes.
6. Rolling Return: Rolling returns calculate average returns over multiple overlapping periods. For example, if you check 3 -year returns daily for the last 5 years, you’ll get rolling returns. This helps you judge consistency and performance stability.
Great for: Assessing how reliable a mutual fund’s performance is over time.
7. XIRR (Extended Internal Rate of Return): XIRR is the most accurate method for calculating returns for SIP (Systematic Investment Plan) investors. It considers multiple cash flows (investments and withdrawals made on different dates) and shows the true annualised Return of your investment.
Ideal for: SIPs, STPs, and investments made in multiple instalments.
To calculate mutual fund returns, the method you use depends on how you've invested through a lump sum amount or a Systematic Investment Plan (SIP). Each investment type requires a different calculation method to reflect the actual performance of your fund.
For Lump Sum Investments
If you've invested a one-time amount, returns can be calculated using either the Absolute Return or the Compound Annual Growth Rate (CAGR), depending on the investment period.
1. Absolute Return
Used for short-term investments, typically less than one year. It gives the total return as a percentage of your initial investment.
Formula: (Current NAV – Purchase NAV) / Purchase NAV × 100
Example: If you bought at ₹100 NAV and it has grown to ₹120, your return is
(120 – 100) / 100 × 100 = 20%
2. CAGR (Annualised Return)
Best suited for long-term investments. CAGR represents the average annual growth of your investment, taking into account compounding.
Formula: [(Final Value / Initial Value) ^ (1/n)] – 1 × 100
Where n = number of years invested
Example: If ₹50,000 grows to ₹70,000 in 3 years,
CAGR = [(70,000 / 50,000) ^ (1/3)] – 1 × 100 = 11.18%
This method is ideal for measuring the average rate of return on mutual fund investments made as a lump sum.
For SIP (Systematic Investment Plan)
When investing through SIPs, where fixed amounts are invested regularly, the XIRR (Extended Internal Rate of Return) is the most accurate method for calculating returns, as cash flows occur at different times.
3. XIRR (For SIPs and irregular investments)
XIRR calculates the annualised return by accounting for each SIP instalment and its corresponding date, giving a more realistic return figure.
You can use Excel, Google Sheets, or most mutual fund platforms to calculate XIRR easily. Just input your SIP amounts and investment dates, along with the final fund value.
Calculating your mutual fund returns online is a quick and hassle-free process. It helps you understand how much your investment has grown and what you can expect at maturity. Just follow these steps:
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Understanding the return rates of mutual funds is essential for evaluating how well your investment is performing and whether it's on track to meet your financial goals. Here's why return rates matter:
1. Measure of Fund Performance: Return rates clearly show how much a fund has gained or lost over time. By comparing returns across different periods, you can determine whether the fund has delivered consistent performance or been impacted by market volatility.
2. Better Investment Decisions: Return data helps you compare multiple funds and choose the one that aligns with your goals and risk profile. For instance, if you're aiming for long-term growth, you'll want a fund with historically higher mutual fund returns.
3. Risk and Volatility Check: Along with returns, metrics like standard deviation help assess the risk level of a fund. A fund with high returns but high volatility may not be suitable for every investor. Understanding return rates helps you balance risk vs reward smartly.
4. Support Long-Term Planning: Analysing long-term return trends (3, 5, or 10 years) helps you estimate future growth. This is crucial for SIP planning, retirement savings, or funding educational goals, providing a realistic picture of potential returns.
5. Identify Top-Performing Mutual Funds: Consistent return rates can help you shortlist good return mutual fund options that have outperformed benchmarks and peers over time. This helps in selecting funds that offer mutual funds higher returns with better management quality.
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Mutual fund returns are not fixed or guaranteed; they depend on a range of dynamic factors. These include market conditions, fund type, investment duration, and even the fund manager’s decisions. Knowing what influences your returns helps you make more informed investment choices, manage risks effectively, and set realistic expectations. Below are the key factors that directly impact mutual fund performance and return potential:
While returns are a key factor in selecting a mutual fund, they shouldn't be the only one. Here are some important points to keep in mind before making your investment decision:
Just like any investment, mutual funds are exposed to various risks that can directly affect your returns. Understanding these risks is crucial for making informed decisions and managing your expectations more effectively.
invest4Edu empowers investors with the tools, insights, and support necessary to make informed decisions about mutual funds. Here’s how it adds value:
Other than mutual funds, we also offer:
Mutual fund returns are one of the most critical indicators of your investment's performance, but they're not the only factor to consider. While it's important to understand how returns are calculated (absolute, CAGR, XIRR, etc.), it's equally important to evaluate why returns fluctuate and how they align with your financial goals.
A well-performing fund doesn't just deliver high returns; it provides consistent returns based on your risk tolerance, investment horizon, and market conditions. That's why a strong foundation in understanding mutual fund returns helps you make informed, confident, and goal-driven decisions.
Whether you're planning for higher education, retirement, or long-term wealth, mutual funds offer flexibility and potential for high growth. But to truly benefit, you need the right tools and expert-backed guidance. That's where invest4Edu makes a difference, by combining investment solutions with personalised education and financial planning services tailored to your future.