Often when analyzing investment options say for instance mutual funds, when you happen to track their past performance you are provided with returns in both absolute as well annualized terms. So, here we will detail on both the return parameters and decide on which one shall be a better criteria to choose an investment:
As the name suggests, this measure of return tells how a particular investment performed over a 1-year period. It is expressed in percentage.
Calculation of annualized return: This is somewhat difficult to compute. Here to the absolute return value, '1' is added. Thereafter the nth root of the number is taken where in is the time period and finally one is reduced from it to get the annualized multiplier.
In contrast absolute return tells about the performance of the given investment without considering the time aspect. The metric is expressed either in INR or percentage terms.
Calculation of absolute return:
Formula for calculating Absolute return: (Current value/Initial Value) -1
Say, if somebody invested Rs. 20000 and now after 5 years it is valued at Rs. 50000, then the absolute return shall be:
Absolute return= (50000/20000)-1
In the case of mutual funds, absolute return is computed by taking into account initial NAV value and the current NAV. Usually, when calculating return from an investment for a period of less than 1 year, absolute return metric is used.
|Point of Difference||Annualised return||Absolute return|
|Return metric||Measures investment performance over a 1-year period||Tells about the fund/ investment performance regardless of the time period|
|Calculation||Difficult to compute||(End value/ initial value) -1|
|Use||The metric provides information on how long term investments carrying different return rates generate value on an annual basis.|
Also used when the return or yield from an investment is computed for a period of less than one year.
Here one can know of the loss or profit made from the initial investment