Don't be fooled by 'This fund has given 200 per cent returns' headlines

Headlines like, 'This mutual fund has given 200 per cent returns', may sound very cool, but they are likely designed to fool you. Because they are merely using absolute returns metric to write a clickbait article. Absolute return Absolute return refers to the total return a mutual fund has earned over an entire period of time. For instance, if one invested Rs 10,000 20 years back and has now grown to Rs 2 lakh, the absolute return of the investment would be an incredible 1,900 per cent returns. But this tells only half the story, as the Rs 10,000 investment grew to Rs 2 lakh over 20 years. Key point: Absolute return is a useful metric for investments less than a year old. Compound Annual Growth Rate (CAGR) CAGR, a fancy way of saying annualised return, measures a fund's yearly return over a long time. Let's take the previous example where Rs 10,000 fund investment grew to Rs 2 lakh over 20 years. In this case, the annualised return is 16.16 per cent. That's still healthy but far more sobre than a 1,900 per cent absolute return, right? Moral of the story: Absolute returns should be considered if your investment is less than a year ol

This article was originally published on August 01, 2024.