By Saksham Arora When you start investing in mutual fund, one of the first things you want to know is “How much profit have I made?” That is where return number comes in. You may have seen different terms like absolute return, annualized return or CAGR and felt a bit confused. But don’t worry! These are just ways of measuring how your money is growing. They are not as scary as they sound.
In this article we will discuss about absolute return and we will explain it in a simple way.
What is Absolute Return?
It is the total percentage of profit or loss you have made on your investment from the time you invested till now, no matter how long that time is.
It does not take into account whether it took 1 year or 3 years to reach their profit. It just tells you how much return you got in total.
Formula of Absolute Return
To calculate Absolute returns subtract the amount you originally invested from the current value of investment. Then divide that number by the original investment amount, and multiply the result by 100 to get the percentage.
Or even simpler Absolute Return is the profit you made divided by your original investment multiplied by 100 to get the percentage.
Now let’s understand with an example. Suppose you invested ₹10,000/- . After 2 years it became ₹12,000/- now apply the formula Absolute return = [(12000-10000)/10000] x 100
= (2000/10000) x100 = 20%
So your absolute return is 20%. That means your investment has grown by 20% since you started. Simple right?
Some Important Note on Absolute Return
It does not show how fast your money grew, just how much it grew overall. So whether it took 6 months or 3 years it will still show 20% in our example.
If you want to know how much return per year then you would look at annualized return.
When it is useful?
Absolute return is useful when
- You want to know the total gain /loss over any period.
- You are investing for less than a year.
- You just want a quick and easy look at your growth.
Conclusion
So next time you check your mutual fund investment and it says “Absolute return =15%”. It means your invested money grows by 15%. It is like checking how much your plant has grown since you planted it, without worrying about how many days it look.