I find returns confusing. Sometimes you talk about annualised returns, while many a time you mention absolute returns. What is the difference between the two?
By Research Desk | Feb 10, 2006
I find returns confusing. Sometimes you talk about annualised returns, while many a time you mention absolute returns. What is the difference between the two? .
The difference between absolute and annualised returns can be explained with an example. Suppose an investment of Rs 1,000 was made five years ago and it has grown to Rs 1,300 today, then the absolute gain would be Rs 300, i.e., a 30 per cent growth. This 30 per cent return is absolute return.
A 30 per cent return on investment would normally qualify as good but for the fact that it was realised over five years. Now if you want to know how much the investment has grown on a yearly basis, you will have to take a look at the annualised returns, which will tell you the return a fund turned in each of the years on an average basis during this five-year period, provided the gains were re-invested every year. In this case, the annualised returns works out to 5.38 per cent. Assuming that the money has been growing at a constant rate, the investment of Rs 1,000 would have grown to Rs 1,053.80 by the end of first year. In the second year, it would have been Rs 1,110.50 (by adding 5.38 per cent of Rs 1,053.80) and so on till the fifth year when it appreciates to Rs 1,300.
In all Value Research products, returns for a period of less than one year are stated in absolute terms, while over a one year period, annualised returns are stated.