What is Annualised return?
Return is the wealth, or profit, that an investment will generate over a specific period of time. It is expressed as a percentage increase (decrease) in the value of the investment during that period.
Returns on mutual funds are shown in two ways: annualized or absolute. The most common method of showing mutual fund returns is annualised return or CAGR (compounded annual growth rate).
When analyzing which mutual fund to see, you can see its return for various time periods e.g. 3 months, 6 months, 1 year etc.
Returns for 1-3 months are usually shown as absolute returns and from 1 year onwards are shown as annualised. For example, if you see a 9% return for 3 months, that means the fund has had a return of 9% in 3 months. However, if you see 9% return for 3 years, that means the fund has returned 9% every year for the past 3 years, not a total 9% return over 3 years!
Remember that compounding interest is applicable to these investments. So if you have a 12% annualised return, you will double your money in just 6 years!
For example, if you see 22.6% annualised return over 5 years, that is actually an absolute return of 177% over 5 years!
Start investing for free with North Loop and get personalized recommendations
Why do 1-year returns for some funds appear more than 5-year returns?
report returns on an annualised basis, and these returns will go up or down over time. Therefore, sometimes you may see a ‘down’ year that impacts the longer term returns. However, long term investing and using a long-term horizon is the correct way to invest!
For example, let’s look at how much money you would make with an annualised return on a specific fund, and how much that exactly is in terms of absolute returns.