What is the difference between absolute and annualised returns?

Annualised Return is how investment fares annually and Absolute Return is a measure of success for investment

What is the difference between absolute and annualised returns?
The Annualised and Absolute Returns Variance
OLM Desk - 14 June 2021

The Annualised Return is a metric of how an investment does over a year, while the Absolute Return is a measure of success for your whole investment.

The main aim of an investment is to make a profit, but far too many people treat investments in a reckless manner without a thorough understanding of how they work. An investor could be engaged in a losing or inferior investment without even realising it if they don't have this information. As a result, it's important to be familiar with and appreciate the two most popular investing metrics.

The yield created by an investment over a period of time is referred to as "return." It's the percentage gain or decline in the investment's valuation over the time frame. Mutual fund returns can be expressed in two separate ways: absolute and annualised.

Absolute Return

The output of an investment is measured in Absolute return, regardless of the amount of time invested. This basic metric shows you how much money you made and can be expressed as a dollar amount or a percentage of your initial investment. Percentages are more efficient when they combine elements of the initial investment and the return into a single number.

All that is required to determine this return is the beginning value – NAV, and the ending value – present NAV. The time of keeping the fund is unimportant in this process. For calculating returns over a term of less than a year, absolute returns are usually used.

Annualised Return

That is the annual return on the investor's investment. An annualised rate of return can also be calculated using a percentage value. Compound annual growth rate (CAGR) refers to the compounding of returns over time. It gives investors a preview of an investment's results, but it doesn't tell them how volatile it is.

While an absolute return is simple to quantify, it is difficult to equate to other investments in different terminology. Comparing mutual funds that have exchanged over varying periods of time helps to provide a better view. This is only so if you reinvest your profits each year.

It's impossible to decide which investment deal is best because each investment has a different time and return. An annualised return addresses this issue by representing the returns in a one-year equal expression.

Which one do you want?

Although absolute return is a calculation of an investment's success in terms of how much money you've gained or lost from the first transaction, annualised return shows how longer-term investments with different return rates produce value yearly.

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