Comparing Mutual Fund Returns: Absolute vs Annualized

"The Battle of Returns: Absolute vs Annualized in Mutual Funds"

The yield created by an investment over some time is referred to as return, usually expressed as a percentage of the initial investment amount. Mutual fund returns can be expressed in two different ways - absolute return and annualized return.

Absolute return is the actual percentage change in the value of the mutual fund over a given period, without taking into account the effects of compounding.

Annualized return, on the other hand, is the average rate of return on an investment per year over a specific period, and it takes into account the effects of compounding. Annualized returns are useful in comparing the performance of mutual funds over different periods.

Both absolute return and annualized return are important metrics for evaluating the performance of mutual funds, but they provide different information and should be used in conjunction with other measures such as risk and volatility when making investment decisions.

Let's understand it with an example: if your investment has grown from Rs 1 lakh to Rs 1.5 lakh over a span of two years, the absolute return is 50 percent. The investment has grown by 50 percent over two years. But, the annualized return of the same investment would be 22.47 percent. This signifies that the investment has grown at an annual rate of 22.47 percent over the span of two years.