How to Track and Manage Your Mutual Funds Returns

Mutual funds are a popular investment option in India, offering a diversified portfolio managed by professionals. 

Assets under management (AUM) of the Indian Mutual Fund Industry has grown from INR 7.66 trillion as on August 31, 2013 to INR 46.63 trillion as on August 31, 2023 more than 6 fold increase in a span of 10 years. There were 15.7 crore mutual fund folios as on 30 September, 2023.

However, to make the most of your mutual fund investments, it's essential to track and manage them effectively. Your financial goals and risk appetite have a significant impact on your returns. Plus, mutual funds might perform better or worse depending on market volatility and other macroeconomic factors.

To assess your mutual fund returns, you should ensure that it is well aligned with your financial goals and is diversified across asset classes. A well-diversified portfolio has the ability to generate optimal returns over a longer period of time. 

The evaluation of your portfolio should be done periodically, and if the fund is underperforming, you may consider rebalancing your portfolio.  

To track and manage your mutual funds portfolio, you can monitor some key ratios of the fund that will help you assess the performance of your portfolio. 

Understanding CAGR (Compound Annual Growth Rate)

CAGR is a crucial metric to evaluate the performance of your mutual fund investments. It tells you the annual growth rate of your investment over a specific period. 

Imagine you have a plant, and every year it grows a bit. The CAGR is like looking at how much it grows on average every year.

To calculate CAGR, you can use the following formula:

CAGR = ((EV/BV)^(1/n)) - 1

Where:

• EV: Ending Value of your investment
• BV: Beginning Value of your investment
• 'n' is the number of years

CAGR gives you an overview of how your investment has grown over time, making it easier to compare different mutual fund schemes.

For example, if you invest INR 5,000 in a mutual fund and the CAGR is 10% over five years, it means that your investment would have increased 10% every year. But the actual growth may vary for different years. In the first year, it may be 13%, in the second year, it may be 7% and so on. CAGR gives you a consistent growth rate that can be used for comparison across different funds. 

The Importance of XIRR (Extended Internal Rate of Return)

XIRR is a more advanced metric used to evaluate the performance of your mutual fund investments, especially when you have irregular investments and redemptions. It factors in the timing of these investments and provides a more accurate return rate.

For an SIP (Systematic Investment Plan), where you periodically make investments, the timing of your investments also affects the returns of your portfolio. In such cases, XIRR is a more accurate metric to calculate your returns and assess the performance. 

You can calculate XIRR in MS Excel using the XIRR function:

=XIRR (Values, Dates, [guess])

Where:

• Values: Amounts you have invested. The investment amount should be written in negative since it is an outflow 
• Dates: Date of investment (and redemption, if at all)
• Guess: An optional guess of the IRR, it is mostly left blank

While CAGR is used to calculate the returns of a lump sum investment, XIRR is useful for an SIP.

Understanding Exit Load and Expense Ratio

Exit load is a fee charged when you redeem your mutual fund units before the specified period. Knowing the exit load is crucial as it affects your returns. 

Additionally, you should also keep an eye on the expense ratio, which indicates the cost of managing the fund. Lower expense ratios are generally more favorable for investors.

Tracking your mutual funds returns may seem complex, but with the right knowledge and tools, you can ensure that you have a healthy portfolio that is in sync with your financial goals. 

Please note that this article is not investment advice. Always consult a financial advisor for personalized guidance on your investment decisions.