MF yield calculation

POSTED BY SK ON April 27, 2011 12:15 am COMMENTS (10)

From the best performing equity fund is “IDFC Small & Midcap Equity-G” with a return of 23.37% for 3 years. To calculate annual return it is 23.37/3, or 7.79%!!!

This looks to be much less than an FD giving around 9.25% an year or 27.75% for 3years. Am I missing anything in MF return calculation?

10 replies on this article “MF yield calculation”

  1. BanyanFA says:

    Hi Jig,
    If you are considering 10 year period, I believe you can have the following situations :
    1. You get a blasting returns 20% CAGR from your mutual fund investments;
    2. On other extreme, zero return from SIPs, whereby your SIPs become zero value (possible only if all industries vanish). I don’t consider this situation as it would exist only in case of a calamity – in that case the Bank holding FD would also vanish.

    The actual return would vary anywhere between the two scenario. I follow the rule of thumb, the business should generally make a return which should be around 1.5 to 2 times the prevailing interest rates in the economy. The reason being, if the business would not make such a return, then the businessman would rather park the funds into Fixed Deposits and eliminate the risk.

    Finally, as mentioned by Ashal, it all depends upon your risk appetite which is vastly influenced upon your current age, number of earning years in hand and dependent. If you are in late 20s or early 30s, you have around 20 more earning years making you a very good candidate for Equity investments.

    Diverting your FD interests into Equity would not affect your initial capital (another way to please your risk appetite) and on the other hand give you the possibility of enjoying the returns of Equity.


  2. Jig says:

    Hello Ashal,
    Thanks for clarificaiton. One example and query i have as below:
    Amount to invest : 10 Lac
    Instrument : NRE FD: 9.25 for 10 yrs.( compound interest)
    Final value in hand: 2495444 ( without risk /guaranteed)( Unless the bank collapsed:)) )

    Now many suggested to go with Interest Payout option and use that for Equity MF.
    I consider the 10 year return of equity MF : 12%
    Amount to invest: 10 Lac
    Payout 95758 per year
    Monthly : 8000 appx
    Now if we calculate the value after 10 yr by putting 8000 monthly in equity fund considering 12% ( which is more than bank fd ) : value 1684679
    so total this way we will have 1684679 + 1000000= 2684678 ( which is given by taking equity risk)

    Now which one is better and what is yield / return in above two cases.

    I am most welcoming the comment as i may doing something wrong , so please educate/highlight if anything require.


    1. Dear Jig, the answer lies in the word ‘RISK’. At the end of the day i.e. after 10Y down the line, your MF return may be 5%, 10% or 15% or 20%. I do not know the exact rate now. It’s your call to make. If you are afraid of taking any risk, compounding in that NRE FD is the way forward. as it’s risk free in that sense as compared to the risk from Eq. MFs.

      But is it really risk free? Just few words inserted or deleted in the Income Tax Act, may change all that tax free status to taxable status. Puzzled, just check out the budget speech & the attempt made by the Govt. of India to recover money from Vodaphone & all such cases as the change has been made from back date i.e. 1962, the implementation date of current Income Tax Act.

      It’s up to you, to decide, which risk is bigger for you? 🙂 🙂



      1. Jig says:

        Hello Ashal,
        Agree with your point that finally it depends on the risk tolerance level.
        Suppose if i will go with Interest payout + equity route, how the taxation apply at the end of FD tenure? Also we have to take all MF charges which i didnt consider in above example.

        1. Dear Jig, for simplicity I assume you are investing 8K Rs. mly out of the interest earned from NRE FD. Also I assume, no tax rule change in between these 10Y. The SIP maturity amount @ 12% for 10Y ‘ll be 18.3L Rs. + 10L Rs. basic investment in the NRE FD & 8000 Rs. last month’s interest. so your total maturity amount ‘ll be around 28.4L Rs.

          From taxation point of view, only the last 11 SIPs ‘ll be considered for STCG rest already completed 1Y holding period, hence no tax at all.



  3. Jig says:

    Well, I am still confused with return calcuations.
    It is compounded return, means it is the yield. and we should compare with Bank FD yield.

    Currently Bank FD is giving 9.25% rate which 10 yrs Yield is 14.**
    Last 5 yr returns of some good funds are as under:

    Franklin india bluechip 11.6
    HDFC TOP 200 13.9
    IDFC Premiur Equity 20.09

    1.So it is advisable that put any liquid amount, planning for more than 10 Yr goal , should invest in FD.
    2.How the case with NRE FD which attract no tax.

    Expecting the expert views on this.

    1. bharat shah says:

      what you refer for bank fd at @ 9,25% INTEREST rate p.a. would give you yield of @11.13% annual yield over a period of 5 yrs . yield is simple average of earning over that period. whereas the return given for mf on valueresearchonline,com for 1 yr and above are compound return over the period, so for comparison purpose you should compare it with it what compound interest bank is giving for its 5 yrs. fd which could be between 9-10% p.a. compounded now,
      if you like to have 5 years yield for the funds mentioned by you are as under:
      fibluechip-@14.62% hdfc top 200-@22,92% idfc premier-29.95%
      for comparison purpose always compare the return rate compounded over the period.
      of course the risk and taxation are different and vary from type of investment.

    2. Dear Jig, please correct your understanding. Yield stands for simple interest earning where as the CAGR for 1Y+ return posted in MFs is a compounded return.

      I’m giving you an example – An instrument is doubling your money in 6Y time.

      Here yly yield = 16.66%

      The CAGR = 12%

      So for the given case in your example, the FD’s coupon rate is 9 or 9.25% which is well below the CAGR of MFs as posted by you.



  4. Sheetal says:

    Glad to know that, as the moment I felt that it may not be annualized I missed a heartbeat after reading so many articles on MFs!!

  5. Sheetal

    Yes , 23.37% is actually the yearly return , not total return . All the returns above 1 yrs is always Annual compounded return , not absolute return .

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