# Understanding investment returns

Returns depend on the performance of the market. The rate of return typically tends to average out over a longer period of time

What is the exact meaning of one-year, three-year and five-year return? For example, if five-year return shown is 10%, does it mean an investment of ₹100 made five years back have now become [100 + (100 x 10% x 5)] = ₹150? Or will it mean compound interest of 10% for five years, in which case the same investment will become [100 x (1 + 10%) ^5] = ₹161?
2) Why is the one-year return usually higher than the three-year return which is again higher than the five-year return?

- Saumitra Ray

The returns are absolute up to one year. That means if the one-year return is 10%, an investment of ₹100 would become ₹110 [100+(100x 10/100)] at the end of the year.

The returns are compound annual growth rate (CAGR) for more than one year. That means that if your five-year return is 10%, your investment of ₹100 would have become ₹161 [100 x (1 + 10%) ^5] at the end of five years.

It is not necessary that one-year return would always be higher than three year returns. Actual returns would depend on the performance of the market. However, the rate of return typically tend to average out over a longer period of time.