Modified on Fri, 11 Aug 2023 at 09:52 AM

What is an absolute return?

Absolute Returns help investors to calculate the simple returns on their initial investment. What an investor need is only the initial and the current or the ending Net Asset value (NAV) of the scheme. In calculating the point-to-point or absolute return, the holding time does not play a role. So if the initial NAV was, say, Rs. 20 and now after 3 years, it is Rs. 40, the point-to-point return comes to 100 per cent.
Formula to calculate Absolute Return:
Absolute return = {(Current Value – Initial value)/Initial Value}*100

What is CAGR return?
CAGR stands for Compounded Annual Growth Rate. It is the growth rate that your initial investment would need to experience to grow to a set level over a specified period of time. It is analogous to compound interest. An investment or an investment portfolio will experience different rates of return over different periods. For example, your portfolio might experience a large gain one year, a smaller gain the next year, and a slight loss in another year.
CAGR allows an investor to calculate their portfolio’s returns over a period of years: say, five years. It filters out the year-to-year “noise” in returns to help the investor figure out how their investments have done over a set period of time. This can be useful in helping them compare their results to other investments or a benchmark index.

The formula for CAGR is:
Divide the ending value of the investment by the beginning value of the investment for a certain time period.
Raise the value calculated in the first step by an exponent of 1 divided by the number of years you are calculating the CAGR.
Subtract 1 from this result.

Let us understand with an example:
Suppose a person invested Rs 12000 in a mutual fund on Jan 01, 2022, and redeem it on Jan 01, 2027. The value of the investment at the time of redemption was 25000. So here CAGR (Compounded annual growth return turns out to be)
Formula to calculate CAGR
CAGR = {(25000/12000)^(1/5)}-1 = 10.76%
Here we have assumed that investment is done only at the beginning and also redeemed only once. In between these 5 years, no investment is made at nothing is redeemed. So CAGR easily turns out to be 10.76%.
But there are sometimes when investment is not made at lumpsum but made periodically. So at that time CAGR turns out to be an irrelevant method to calculate returns.

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