DIVERSE PERSPECTIVES

There are several methods for calculating returns, and selecting the optimal approach depends on various factors

Returns on investment is a key criteria used by investors when choosing between asset classes or products within the same asset class. Simply put, return on investment refers to the excess money earned over and above the principal invested. For a fixed deposit product, the returns would be the interest rate offered by the product. However, this rate can vary depending on whether the investor wants the interest to be reinvested or paid out periodically, such as quarterly, half-yearly, or annually. The time of maturity for the investment, that is, the principal amount remains fixed and unchanged.

For a mutual fund product, which is open-ended like in the case of equity mutual funds, the returns are not fixed. Therefore, to calculate the returns, the duration of the investment or the time spent staying invested in the product, plays an important role. The duration for which an investment is held can vary from investor to investor, and this can impact the calculated returns.

Moreover, the complexity increases when the investor has opted for a Systematic Investment Plan (SIP) or made irregular investments, as the duration or the time spent staying invested for each installment will vary. This variation needs to be considered to accurately calculate returns.

There are different methods available to calculate returns on investment, which take into consideration the variations mentioned above. These methods include absolute return, compound annual growth rate (CAGR), or extended internal rate of return (XIRR). While the calculation itself is straightforward and can be done on an Excel spreadsheet or on various websites, selecting the appropriate calculation method is critical to ensure the accuracy of the return on investment.