How Many Types of Returns We Have in Mutual Funds?

When investing in mutual funds, understanding the different types of returns is crucial for evaluating performance. Two commonly discussed types of returns are absolute return vs annualised return.

Absolute return refers to the total increase or decrease in the value of an investment over a specific period, expressed as a percentage. It measures the actual gain or loss without considering the time frame. For example, if you invest $1,000 in a mutual fund and it grows to $1,200 after two years, the absolute return is 20%. This metric is straightforward but doesn't account for the investment period, making it less useful for comparing investments held for different durations.

In contrast, annualised return provides a more nuanced view by standardizing the return over a one-year period. It expresses the average annual return an investment has generated over a specific timeframe, making it easier to compare different investments. Using the previous example, the 20% absolute return over two years translates to an annualised return of approximately 9.54%. This calculation assumes the returns compound over the investment period.

Understanding absolute return vs annualised return is essential for investors. Absolute returns give a snapshot of total gains or losses, while annualised returns offer a standardized measure for comparing investment performance over time. Using both metrics provides a comprehensive view of a mutual fund's performance, helping investors make informed decisions.