Widely read:
Summary: Ever scratched your head over mutual fund returns that seem to shift depending on how you look at them? This story breaks it down super simply. You'll see why knowing both types makes you a sharper investor.
Have you ever looked at your mutual fund statement and wondered why the returns look impressive one way but more modest another? Returns in mutual funds come in two flavours: absolute and annualised. Understanding both helps you make smarter decisions as an investor.
Absolute returns simply measure the percentage growth from your initial investment to its current value, regardless of time taken. For instance, if you invested Rs 1 lakh two years ago and it's now Rs 1.5 lakh, that's a straightforward 50 per cent absolute return over those two years.
On the other hand, annualised returns, like the compounded annual growth rate (CAGR), break this down to an equivalent yearly rate, factoring in compounding. In the same example, the CAGR would be about 22.47 per cent, showing the steady annual growth rate that would turn Rs 1 lakh into Rs 1.5 lakh over two years.
Why the difference matters
Time is key here. Absolute returns don't adjust for duration, so a 50 per cent gain over 10 years (about 4.14 per cent CAGR) looks the same as over two years, misleading for comparisons. As per Value Research's return methodology, periods of less than one year use absolute returns, while periods of one year or more use annualised returns by default.
Suggested read: Don't be fooled by 'This fund has given 200 per cent returns' headlines
For SIPs with staggered investments, use XIRR (Extended Internal Rate of Return) for precise annualised figures, accounting for cash flow timing.
Real-world examples
Consider a flexi-cap fund: Rs 5 lakh lumpsum grows to Rs 8 lakh in five years.
In terms of absolute returns, the fund would have grown 60 per cent, while its CAGR would be around 9.86 per cent. While handy for quick checks, CAGR reveals the true pace.
Here’s another example: Nifty 50 averaged 12 per cent CAGR over 20 years (as of 2025), turning Rs 1 lakh into nearly Rs 10 lakh, despite volatile absolute paths. Test yours with Value Research’s Mutual Fund Calculator.
Pitfalls to avoid
Chasing high absolute numbers often leads to overlooking time or risk. Equity funds showed a 22 per cent average SIP CAGR over 10 years, but short-term absolutes fluctuate wildly. Always compare the same-period annualised returns across funds.
How to choose the right metric
For short horizons (less than one year), absolute return suffices.
For long-term goals, prioritise CAGR or XIRR for realistic planning.
Suggested read: What do the various types of fund returns mean?
This article was originally published on May 06, 2022, and last updated on February 26, 2026.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
For grievances: [email protected]
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
