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M — MUTUAL FUND BASICS

What is Annualized Return

in Mutual Funds? How is it
calculated?
by Shivani Chaluvadi · July 9, 2018 ·  6.8K views

‘Return’ is the yield that an investment generates over a period of time. It is the
percentage increase or decrease in the value of the investment in that period.
Returns on mutual funds are expressed in 2 different ways, viz, absolute and
annualized. The most popular one being the annualized return or CAGR
(Compounded Annual Growth Rate).
 A mutual fund fact sheet shows the fund facts and the most important to us as
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investors are its return. The returns are usually given for 1-month, 3-month, 6-
month, 1-year, 3-year, 5- year and so on. The returns for 1 to 3 months is given in
absolute basis and the returns from 1 year and above are given in absolute basis.
So when you see a 5% under the 3-month column, it means the fund has given 5%
in 3 months’ time. 12% annualized return in 3 years means 12% return earned
every year for the past three years and not 12% total return in 3 years.

Albert Einstein hasn’t simply said that compound interest is the 8th wonder of
the world. Compounding can do wonders to your money. 12% annualized return
can double your money in 6 years. And 15% annualized return can double your
money in less than 5 years! Below is the table that shows how long different
interest rates take to double your money.

Annualized Return Time taken to 2x your money

5% 14 years, 2 months

8% 9 years, 0 months

10% 7 years, 3 months

12% 6 years, 1 months

15% 4 years, 11 months

20% 3 years, 9 months

25% 3 years, 1 months

How to Calculate Annualized Return and

Absolute Return?

Absolute Return

Absolute returns, also known as point-to-point returns, calculate the simple

returns on initial investment. To calculate this return all one needs is the initial
and ending NAV (present NAV). In this method, the duration of holding the fund
is not important. One usually uses absolute returns to calculate returns for a
period of less than one year.

Formula for absolute returns

Absolute returns = ((Present NAV – Initial NAV)/ Initial NAV) *100

Annualized Return
 Annualized return is the amount of money the investment has earned for the
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investor per annum. CAGR is compounding of returns earned over a period of
time. It provides a snapshot of the of an investment’s performance but doesn’t
give investors any indication about the volatility. Using annualized return gives a
clearer picture when comparing various mutual funds that have traded over
different periods of time. However, this is applicable only if you re-invest your
gains every year.

Formula for annualized return

Annualized return = ((1 + Absolute Rate of Return) ^ (365/no. of days)) – 1

OR

Annualized return = ((1 + Absolute Rate of Return) ^ (1/no. of years)) – 1

Example

Fund Time Absolute Annualized

Date
NAV Period Returns Returns

March 28, 2018 30.51

February 28, 31.02 1 month -1.64% -1.64%

2018

September 29, 28.79 6 month 5.97% 5.97%

2017

March 31, 2017 25.82 1 year 18.16% 18.16%

March 31, 2016 20.96 2 years 45.56% 20.65%

March 31, 2015 21.73 3 years 40.40% 11.98%

March 31, 2013 10.99 5 years 177.62% 22.66%

March 31, 2008 9.75 10 years 212.92% 12.08%

The above table shows the NAV of Aditya Birla Sun Life Tax Relief 96, (which has
been taken only for the purpose of illustration). The returns up to 1 year are the
same in the case of absolute and annualized. The returns after 1 year are
different. While the absolute returns show how much the investment has grown
from the initial date, annualized return show how much the fund grew annually
to reach that current return. This doesn’t mean the fund grew at a certain rate
every year. It’s just the average growth of the fund year on year. Annualized
return normalizes the absolute return and lets you know the returns over a given
period of time.
 Why 1-yearBlog
Upwardly returns for somefunds are
higher than its 3 or 5-year returns?
Mutual funds returns are reported on an annualized basis. And mutual fund
returns fluctuate across years. This is the reason why 1-year returns may appear
higher than 3 years returns.

Let me take you through a small example.

Aditya Birla Sun Life Tax Relief 96, one of the top fund in tax saving category of
mutual funds has the following returns.

1yr: 18.16% annualized return => 1 lakh invested in this fund 1 year ago has
become 1.18 lakh today

3yr: 11.98% annualized return => absolute returns of 40% in 3 years => 1 lakh
invested in this fund 3 years ago has become 1.40 lakh today

5yr: 22.66% annualized return => absolute returns of 177% in the last 5 years
=> 1 lakh invested in this fund 5 years ago has become 2.77 lakh today.

5 year 22.66% annualized return mean that money invested 5 years ago in the
fund has grown 22.66% every year, not 22.66% overall but instead 177%
overall. This is the principle of compounding at work growing one’s investment
over the years!

Check out our MF Calculator, SIP Calculator, Money Multiplier Calculator and other
tools at Upwardly.in
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