Investors assess mutual fund returns using two methods

Investors in mutual funds need to understand how to calculate returns. This helps them assess their investments more effectively. Two main types of returns to consider are absolute return and annualized return. Absolute return is for investors holding fund units for less than a year. It measures the growth of an investment from the time of purchase to the current moment. To calculate it, you take the current net asset value (NAV) and subtract the purchase NAV. Then, divide this number by the purchase NAV and multiply by 100 to get a percentage. For those holding investments for over a year, annualized return is more relevant. This calculation shows the average rate of return over a specific period, considering the power of compounding. Investors should always compare both types of returns to their respective benchmarks. For instance, if a large-cap fund only fell 7% during a market downturn, and the benchmark fell over 10%, the fund performed relatively well. However, if a small-cap fund shows a 15% annualized return, but the benchmark or peers did better, it may be time to reassess that investment.