Different Types of Returns in Investment

 

💴Different Type of Returns in Investment :-

💰Absolute return

Absolute return refers to the total return a mutual fund has earned over an entire period of time.

✅For instance, if one invested Rs 10,000 20 years back and has now grown to Rs 2 lakh, the absolute return of the investment would be an incredible 1,900 per cent returns. But this tells only half the story, as the Rs 10,000 investment grew to Rs 2 lakh over 20 years.

Key point: Absolute return is a useful metric for investments less than a year old.

💰Compound Annual Growth Rate (CAGR)

CAGR, a fancy way of saying annualised return, measures a fund's yearly return over a long time.

✅Let's take the previous example where Rs 10,000 fund investment grew to Rs 2 lakh over 20 years. In this case, the annualised return is 16.16 per cent. That's still healthy but far more sober than a 1,900 per cent absolute return, right?

Moral of the story:
Absolute returns should be considered if your investment is less than a year old, whereas CAGR comes in while checking an investment's returns over more than one year.

💰Extended Internal Rate of Return (XIRR)

XIRR may sound exotic but it simply measures returns if you staggered your investments over a period of time. SIP is a great example.

✅While CAGR calculates the annualised returns of a one-time investment, XIRR is a better choice to calculate SIP/SWP (systematic withdrawal plan) returns.

Let's now understand trailing return, another metric that measures an investment's performance.

💰Trailing return

Trailing return, also known as point-to-point return, calculates returns between two dates.

✅For example, a one-year trailing return is from August 1, 2023, to August 1, 2024. A five-year trailing return is from June 1, 2019, to June 1, 2024.

Weak point: Trailing return does not convey anything about the consistency or volatility of the fund.

💰Rolling return

Rolling return provides a comprehensive view of a fund's performance over time.

To calculate three-year annual rolling returns over 10 years, you would take the following steps:

√ Calculate the return from Year 1 to Year 3
√ Then, from Year 2 to Year 4
√ Continue this process until you calculate the return from Year 8 to Year 10.

✅Key point: Rolling return shows how consistent a mutual fund has been over a period of time.