176) How To Calculate Total Returns & See Fund Volatility

 

Investing is mostly about Returns and Risk. 

Risk can be simply defined as the possibility of loss. The more changes in the fund prices, the more volatile the fund is. When you get the Total Return value, the value does not tell you how risky or volatile had the fund been.

Looking at the annual performance of the 3 funds in the chart above, which fund is the best performing fund? Is it:
A) Fund A (light blue)
B) Fund B (dark blue)
C) Fund C (light green)

Let's understand how the 5 Years Total Returns are calculated.
Remember that returns are compounded over the 5 years period. The calculation is shown for Single Lump Sum investment at the beginning of 2014. 

For Fund A:
(1 + TRA) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-1.2%)(1+9.49%)(1-2.34%)(1+12.96%)(1-4.34%)
= (0.9880)(1.0949)(0.9766)(1.1296)(0.9566)
= 1.1416
TRA = (1.1416-1) = 0.1416 = 14.16% (GAIN)

For Fund B:
(1 + TRB) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-3.45%)(1-1.2%)(1-1.42%)(1+25.11%)(1-7.24%)
= (0.9655)(0.9880)(0.9858)(1.2511)(0.9276)
= 1.0913
TRB = (1.0913-1) = 0.0913 = 9.13% (GAIN)

For Fund C:
(1 + TRC) = (1+R1)(1+R2)(1+R3)(1+R4)(1+R5)
= (1-14.38%)(1+25.01%)(1-11.91%)(1+10.66%)(1-8.93%)
= (0.8562)(1.2501)(0.8809)(1.1066)(0.9107)
= 0.9502
TRC = (0.9502-1) = -0.0498 = -4.98% (LOSS)

Here is a snapshot of the calculation.

Here is the link to the Excel file


https://drive.google.com/open?id=17TWvKDq6xRzXbGQ7HECh8hjRmrHlkrw9

So, the Winner is Fund A with a Total Return of 14.16%. 

Do you notice that Fund A is also less volatile in terms of returns? The Returns are not the BEST or WORST in any single year. However, Fund A is quite consistent in the returns. Fund A gave moderate returns in the good years and little losses in the bad years.

Fund B is also quite volatile in terms of returns.  Fund B gave the BEST performance with 25.11% return in 2017. The Fund A and Fund C gave less than half of Fund B's returns.

The most volatile is Fund C. For 2014, 2016 and 2018, it gave the worst returns. For 2015, it was the Best fund with highest return.

In conclusion, do look at longer term fund performance. Being the BEST fund for 1 year during good or bad market does not mean it is the BEST fund in the long term.

Look at your objective of the investment. Is it for retirement, children education, down payment for a new house, honeymoon trip or any other objective? When do you need the money? 

Do consult your Unit Trust Consultant on how to do a proper planning for your investment objectives.