Tag Archives: personal finance

Why do we invest in mutual funds? The fairly obvious answer would be to earn returns on our investment and to have enough corpus for our future goals. We need tangible numbers on our screens which give us a good night’s sleep that we have invested in the right fund. However, there are multiple measures for the returns earned by the mutual fund, and we see multiple percentage numbers flashing on our screens. These measures are explained with examples in the following paragraphs - 1. Absolute Returns This represents the growth of your investment in absolute terms without considering the time period. For example, if you had invested Rs 10,000 in a mutual fund and it grows to Rs 15,000, the gain earned would be Rs 5000. Absolute returns would be Rs 5000/Rs 10,000 = 50%. Even if your investments grew to Rs 15,000 in 10 years the absolute returns would still be 50%. 2. Annualised Returns (also known as CAGR) This measures the increment in the value of your investment on a yearly basis. The effect of compounding is included in this return (Compounding in simple terms is earning returns on the profits earned from your investment). For example, if the initial investment is Rs 10,000 and the value of the investment after 5 years is Rs 15000, then the annualised returns would be 8.4% and if the time period was 3 years, the returns would be 14.5%. This measure takes the time period into consideration and gives a measure of y-o-y returns on your investment in the fund. 3. Annual Returns This is computed by considering the return earned by the scheme from January 1st (first day of business) to December 31st (Last business working day). If the NAV of a fund was Rs 100 on January 1st and the NAV on December 31st was 120, the gain would be Rs 20 and the annual return would be 20%. This is the most simplistic measure which is used for communication to the investor. Market conditions play a significant role in the returns earned by mutual funds. Hence, it is advisable to compare annual returns across time periods with respect to category average or the benchmark as declared by the fund. 4. Point to Point Returns This measures the annualised returns between two points in a given time period. For example, you would want to look at the performance of a fund in the pre-Covid years i.e., 2017-2019, one would consider the point-to-point return to compute the same. The NAVs at the start and end dates are required to compute these returns. 5. Total Returns Initial ValuesNAV Initial50Initial Investment10000Units Purchased = Investment/NAV200After 1 yearNAV 52Value of investment = Units * NAV10400Capital Gains400Assuming Dividend is declared by the fund in this 1 yearDividend Declared/ unit2Dividend earned (Units * Dividend/Unit)400Total Returns800Total Return % (Total Return/Initial Investment)8% Total return includes the returns earned from capital gains and dividends and is expressed as a percentage of the initial amount invested. Consider that you had invested Rs 10,000 into a fund whose NAV was Rs 50. Total Returns % = Capital Gains + Dividend earned / Initial Investment Here, the total return earned would be 8%. 6. Trailing Returns It is the annualised return of the period that ends on the date of calculation (or today or latest NAV). Trailing returns of 1, 3, 5 or 10 years (etc) can be calculated. For example, a 1-year trailing return from today (27th Feb 2020) would be calculated by taking the latest NAV and the NAV of the fund 1 year ago. This measure is used by most of the mutual funds and pages which analyse the past performance of the funds.  Initial NAV (27th Feb 2018)40Final NAV (27th Feb 2021)70Years3Returns 20.5% For example, if the NAV of a fund today is Rs 70 and the NAV of the fund 3 years ago was Rs 40, the trailing 3-year return would be 20.5%. Returns = [Final NAV / Initial NAV] (1/Years) - 1 As an investor, this measure aids in screening the fund's performance and analysing the consistency of the fund manager in providing the returns to their pool of investors. However, one should note that these returns could offer a biased perspective as they are based on relative market conditions – current vs past conditions. Hence, an investor should consider 3,5 and 10 years to understand the consistency in earnings and the fund's ability to sail over market tides. In bull markets, where there is high optimism in the market, the trailing returns are high, as the Final NAV would be soaring high, whereas, in the bear markets, these returns would be on the low. 7. Rolling Returns These are annualised returns (CAGR) but are computed using overlapping periods. They give the measure of the growth of an n-year return over a period of m years.  For example, if you would like to invest in an equity mutual fund for 5 years, you would look at the data in 5-year blocks and compute the 5-year return over a 10-year period (say). As shown in the table below, we have considered a period from 2005-2020 to calculate the 5-year rolling returns (n=5, m=20). Aligning with our objective, to calculate the return of 2010, we consider the NAV that was 5-years ago which is 2005. The exercise is performed for all the years to obtain the range of returns that the fund has given to the investors. One can also calculate the Rolling Return Average, by calculating the average of all the returns computed in the previous step = 7.4% (in this example). Yearly DataNAV5years agoNAVReturns (CAGR)01-01-201010001-01-2005785.1%01-01-201110301-01-2006805.2%01-01-201211001-01-2007874.8%01-01-201312001-01-2008905.9%01-01-201415001-01-2009959.6%01-01-201516101-01-201010010.0%01-01-201617201-01-201110310.8%01-01-201719001-01-201211011.6%01-01-201819801-01-201312010.5%01-01-201921001-01-20141507.0%01-01-202020001-01-20151614.4%01-01-202120801-01-20161723.9% The rolling returns give a perspective of the maximum and minimum ranges of returns that the fund has offered over a period of time, instead of only the point-point or annual returns, which could become biased measures based on the market conditions. These can be calculated on a daily/weekly/monthly basis till the latest NAV for a fixed period of time. It gives a more accurate picture of the fund’s performance in various market conditions, eliminating the bias that could be associated with calculating the return at a fixed point in time.  8. SIP Returns All the above measures are suitable for lumpsum investing where one considers the returns between two points. However, in the case of SIPs, there is a systematic flow of amounts into the fund at different points in time. This return can be calculated using the Internal Rate of Return (IRR), which is a financial metric used to compute the return of a series of cash inflows and outflows. Conclusion The measures for calculating returns have been highlighted above which are to be used in conjunction with the objective to obtain the accurate measurement of the performance. You could get started with your investment journey by analysing funds on the EduFund app or this website.

Parenting is a responsibility, and there are no two ways about it. The education and experiences of your child are primary to the kind of person your child becomes. Their success, wisdom, and understanding of the world are dependent on education. It begins with their schooling and continues to rely heavily on higher education and beyond. When something is this crucial to the well-being of your child, you ought to plan and plan early.  Education planning necessities  An education plan for your child has two essentials. One is the decision-making process that involves choosing the right school, college, and university, and the second is the financial aspect to fund the desired degrees. The decisions your child takes (with your consult) about studying at a particular university are driven by research and counseling - and they’re mostly left to the last couple of years before university.  The finances, however, require wise long-term investments and insight. To realize this undertaking, we have to first calculate the many expenses of higher education and the eventual corpus you would need to fund your child’s dreams.  Calculate costs better with helpful tools Calculating the cost of college education ten to fifteen years in the future might feel burdensome, so it is better to use tools like the education cost calculator on the EduFund app. The smart calculator accounts for education inflation - the increase in tuition and living expenses year on year.  Accounting for education inflation Education inflation can be understood with a simple example. An MBA from a reputed institution in India like IIM Bangalore cost around 10 lacs in 2010, and now the same exact degree costs about 23 lacs in 2021. The education inflation in the last decade in India was more than double the general inflation. Education inflation across the world has been similar and is currently on the rise.  On the EduFund app, you just have to enter the details of your child, possible universities they’d want to go to and the year they’d begin university. The calculator will give you an accurate estimate of the amount you would need when your child is ready for college. This becomes your north star, your investment goal for your child’s dream education.  Investment advise from the wise Once you have the goal calculated, the next step is to start an investment plan where you invest a certain amount every month (the EduFund calculator will give you this amount as well) into an investment vehicle that can give you good returns. If you’re new to investing, it would be wise to get in touch with a wealth advisor who can guide you.  If you have plans for your child to study at the top universities in the world, a wealth advisor would encourage you to diversify your portfolio by investing in the US markets.  Advantages of investing in US markets  Ever since Indian independence, the rupee has gradually depreciated compared to the US dollar. This is the reason why exchange rates remain a nightmare even when we’re thinking of a small vacation to the US or Europe. Now imagine studying there for a few years and those expenses, and the burden that exchange rates could then be.  The solution? Invest in the US markets and save in dollars in order to spend in dollars.  The US markets are mature, with some of their large-cap companies holding a valuation of over a trillion dollars. Additionally, the US indices like the S&P 500 have delivered consistently good returns for over six decades.   1. Geographical diversification  If there is one investment lesson that most of us are familiar with, it has to be not putting all your eggs in one basket. This lesson doesn’t just end with investing in multiple companies in diverse fields but also includes investing in geographically diverse markets.  Often, the Indian market experiences ups and downs based on regional factors that include politics, regime changes, natural disasters, and more. A portfolio that isn’t geographically diversified would be heavily affected by these.  To counter this, investing in the US markets is an obvious solution as the market sentiments that affect the Indian markets rarely have an effect on the US markets.  2. More than one way to earn returns When you start investing for your child’s education in the US markets, you’re gaining in two ways - first by the dividends and capital appreciation, and second, with the depreciation trend of the rupee. You have a strong possibility of getting more rupees for every dollar in the long term.  With so many obvious advantages to look forward to, the only hardships stopping Indian parents from investing in the US were the lack of accessibility and the long paperwork. Thankfully now, platforms like EduFund make this process simple and convenient. No paperwork. No long waiting periods. No confusion.  FAQs Where can I invest money in education? There are many ways to invest in education. From mutual funds to the US market, the choices are unlimited. Depending on your risk appetite and time horizon, you can pick the best funds and investment options with the help of a financial advisor. With the cost of education rising, mutual funds, our US stocks, and ETFs are great investment choices for parents who have over 10 years of investment ahead of them. How to invest in US markets? As an Indian investor, you can invest in US markets with the help of a foreign or domestic broker or directly. Where should I invest money to get good returns for students? To fetch good returns, the best investment options are investing in mutual funds, the US market via stocks and ETFs, PPF, and government programs like Sukanya Samriddhi Program. Conclusion Someone wise once said that an investment in education pays the best dividends. We understand that every parent wants their child to have more opportunities than they did, and greater resources at their disposal than they did. With time by your side, some discipline, and the power compounding, it is easily possible. Consult an expert advisor to get the right plan TALK TO AN EXPERT