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Mutual Fund performance measurement with CAGR

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The next topic is called *Computing Mutual Fund returns - Absolute Returns and CAGR methods*

We invest in mutual funds for gains. i.e to get profits

In general, we need to invest in mutual funds for the long term.

However, in some cases we might have to sell the fund within a short time.

While in other cases, we will hold them for a long time, often for more than 1 year.

When we invest in mutual funds for the short term, we need to compute point-to-point returns.

So, if u have interested as the fund house took for calculation, between June 30, 2015 to June 30, 2016 you will get 1.73% returns

If you invested between June 30, 2014 to June 30, 2015, you would have got 13.99% returns

And if you have invested between June 28, 2013 to June 30, 2014, you would have got 49.87% returns

But in reality, you might not get these exact returns.

They may be up and down because of the different dates in which we have invested.

I will explain you with an example.

Assume you invested on January 1, 2016.

You invested Rs. 10,000

And yesterday, you need the money badly, so you sold all the units on August 20, 2016.

You got Rs. 12,500/- as redemption proceeds

Our holding period is from January 1, 2016 to August 20, 2016

So, it is less than 1 year.

Actually, there will be an exit load of 1%. We are ignoring that for the sake of this example.

Our gain = Rs. 12500 - Rs 10000 = Rs 2500

So profit %age = 2500 / 10000 = 25%

So we got 25% return during this period.

Simple interest calculation, right?

Our next topic is *Standard Deviation, Sharpe Ratio and Beta*

These are actually statistical measures of a fund.

It helps us to understand how the fund is behaving at different times.

This is a little advanced topic. I will touch the basics only here. If we go deeper, i will confuse more than give clarity.

These statistical numbers are used by large investors.

For instance, companies like Reliance wont keep funds idle in their current accounts for long time.

They have a treasury department which decides the cash flow needs on a day to day basis

As i was telling, treasury departments of large companies invest in debt mutual funds

Because Current accounts wont give any interest.

And they have huge cash. Like Rs 1000 Cr lying idle

An efficient manager would carefully assess the needs and would consider investing this money into a liquid fund.

Because even for 1 day investment, they get some profit out of it

But Mutual funds are called *investments* and not *savings*

So, there is a certain amount of risk involved.

So they are meticulous in choosing schemes, even for a 1 day investment.

Standard Deviation, Sharpe Ratio and Beta are the most basic statistical measures they use.

So, it makes sense to know what they are.

We may or may not use them for practical reasons because our investments are generally small amounts

And minor deviations in these measures might not make that much materialistic impact for our investments.

Because by the time we realize something in the scheme, the fund manager might have already made changes to the scheme.

This is because we do not get live data about the measures.

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