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 three different ways, viz, absolute and annualized. The most popular one being the annualized returns or CAGR (Compounded Annual Growth Rate).

A mutual fund fact sheet shows the fund facts and the most important to us as 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. A 12% returns against 3-years is 12% returns earned every year for the past three years and not 12% total return earned in the span of 3 years. This is because the returns are given on an annualized basis.

Albert Einstein hasnt simply said that compound interest is the 8th wonder of the world. Compounding can do wonders to your money. A 12% annualized return can double your money in 6 years, 1 month. And a 15% return can double your money in 4 years, 11 months. Below is the table that shows how long different interest rates take to double your money.

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.

The formula for calculating the absolute returns = ((Present NAV Initial NAV)/ Initial NAV) *100

Annualized return is the amount of money the investment has earned for the investor per annum. CAGR is compounding of returns earned over a period of time. It provides a snapshot of the of an investments performance but doesnt give investors any indication about the volatility. Using annualized returns 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.

The formula for calculating annualized returns = ((1 + Absolute Rate of Return) ^ (365/no. of days)) 1

The above table shows the NAV ofAditya 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 returns show how much the fund grew annually to reach that current return. This doesnt mean the fund grew at a certain rate every year. Its 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.

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