What is Absolute Returns and what is Annualized Returns ? Which one should the investor trust while investing in mutual funds ?

Suppose :
1) If you invest Rs. 100 ; after 1 year returns is 20% so end of the year it becomes Rs. 100 + 20= Rs. 120.
2) Now second year also you make a profit of 20% so your money is Rs. 120 + 24 = Rs. 144
3) After 2 years your money of Rs. 100 is now Rs. 144 so your
Absolute returns for 2 years is 44% whereas Annualized returns is 20% year on year.

The difference between absolute and annualised returns can be explained with an example. Suppose an investment of Rs 1,000 was made five years ago and it has grown to Rs 1,300 today, then the absolute gain would be Rs 300, i.e., a 30 per cent growth. This 30 per cent return is absolute return.

A 30 per cent return on investment would normally qualify as good but for the fact that it was realised over five years. Now if you want to know how much the investment has grown on a yearly basis, you will have to take a look at the annualised returns, which will tell you the return a fund turned in each of the years on an average basis during this five-year period, provided the gains were re-invested every year. In this case, the annualised returns works out to 5.38 per cent. Assuming that the money has been growing at a constant rate, the investment of Rs 1,000 would have grown to Rs 1,053.80 by the end of first year. In the second year, it would have been Rs 1,110.50 (by adding 5.38 per cent of Rs 1,053.80) and so on till the fifth year when it appreciates to Rs 1,300.

In all Value Research products, returns for a period of less than one year are stated in absolute terms, while over a one year period, annualised returns are stated.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s