What is an Annual Return in Mutual Funds?
Annual return refers to the percentage change in the value of an investment over one year. It reflects how much the investment has gained or lost in value, including any income such as dividends or interest. This metric helps investors understand the performance of their investments and is crucial for assessing their profitability.
Assume you invested â¹50,000 in a mutual fund. After one year, the investment is valued at â¹55,000, and you receive â¹2,000 in dividends.
The final value of the investment is the sum of the current investment value and dividends received.
Finalâ¯Value = â¹55,000 + â¹2,000 = â¹57,000
Annualâ¯Return = ((57,000 - 50,000) / 50,000) * 100%
Annualâ¯Return = 14%
This calculation shows a 14% annual return, indicating a positive performance of the investment over the year.
The formula for calculating annualised return is:
Annualised Return = [((1 + R1) * (1 + R2) * (1 + Rn)) ^ (1 / N) – 1] * 100
Where,
N represents the total number of periods considered for measurement.
R1 represents the annual return for the first year, R2 denotes the annual return for the second year, and so on.
For instance, if you bought 200 shares at â¹10 each and held them for five years, with the stock increasing by 10% in the first year, and 14% in the second year.
The overall rate of return for the five years:
Annualised Return = [((1 + 10%) * (1 + 14%)) ^ (1 / 5) – 1] * 100 = 4.63%
The annualised return on your investment over the five years is 4.63%.
By using tools like a mutual fund annual return calculator, you can easily determine the annualised return and assess the growth of your investments.
Understanding Annual Return
The annual return is a key indicator of an investment's performance over one year. Here is a clearer view of what it entails:- A positive annual return indicates that the investment has grown in value, whereas a negative return means the investment has lost value. This measure reflects the net result of the investment's performance.
- To provide a consistent measure over different periods, the annualised return (or Compound Annual Growth Rate, CAGR) is used. This represents the geometric average amount of money an investment earns annually over a given period, assuming the returns are reinvested.
- Understanding the annual return helps investors evaluate how their investments are performing relative to benchmarks or other investment opportunities. It also assists in making informed decisions regarding asset allocation and future investments.
Example of the Annual Return Calculation
To illustrate how to calculate the annual return, follow this example:Assume you invested â¹50,000 in a mutual fund. After one year, the investment is valued at â¹55,000, and you receive â¹2,000 in dividends.
The final value of the investment is the sum of the current investment value and dividends received.
Finalâ¯Value = â¹55,000 + â¹2,000 = â¹57,000
Calculation:
Annualâ¯Return = ((Finalâ¯Value − Initialâ¯Investment) / Initial Investment) * 100%Annualâ¯Return = ((57,000 - 50,000) / 50,000) * 100%
Annualâ¯Return = 14%
This calculation shows a 14% annual return, indicating a positive performance of the investment over the year.
How to Calculate Overall Return on an Investment
Calculating the overall return involves assessing performance over multiple periods, using the annualised return or Compound Annual Growth Rate (CAGR).The formula for calculating annualised return is:
Annualised Return = [((1 + R1) * (1 + R2) * (1 + Rn)) ^ (1 / N) – 1] * 100
Where,
N represents the total number of periods considered for measurement.
R1 represents the annual return for the first year, R2 denotes the annual return for the second year, and so on.
For instance, if you bought 200 shares at â¹10 each and held them for five years, with the stock increasing by 10% in the first year, and 14% in the second year.
The overall rate of return for the five years:
Annualised Return = [((1 + 10%) * (1 + 14%)) ^ (1 / 5) – 1] * 100 = 4.63%
The annualised return on your investment over the five years is 4.63%.
By using tools like a mutual fund annual return calculator, you can easily determine the annualised return and assess the growth of your investments.
