August 9, 2023

What Is Absolute Return In Mutual Fund?

What Is Absolute Return In Mutual Fund?

Absolute return in a mutual fund is the gain or loss made by the fund over a specified period, irrespective of market conditions. Unlike relative returns that compare the performance of a fund to a benchmark, absolute returns merely represent the increase or decrease in the value of the investment. They provide an unambiguous measure of a fund’s performance.

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Absolute Return In Mutual Fund

The absolute return is the raw net returns of a mutual fund without considering the influence of external factors like market volatility or benchmark performance. 

For instance, if you invest ₹1,00,000 in a mutual fund and after one year, the value of your investment becomes ₹1,10,000, your absolute return is ₹10,000 or 10%. The concept of absolute return is critical because it allows investors to evaluate the profitability of their investments without the need for benchmark comparisons.

Absolute Return Example

Consider this case study. Let’s say you invested ₹50,000 in an absolute return mutual fund in India at the beginning of 2022. By the end of 2022, your investment has grown to ₹57,000. 

Thus, the absolute return on your investment for the year 2022 would be ₹7,000 or 14%. This return is calculated irrespective of how the broader market or a specific benchmark index performed during this period. The sole focus is on the gain your investment made.

How To Calculate Absolute Return In Mutual Fund?

The calculation of absolute return in a mutual fund is quite simple. It’s the difference between the final value of the investment and the initial investment, divided by the initial investment, all multiplied by 100 to get a percentage. The formula follows (Final Value – Initial Value) / Initial Value * 100%.

  1. Identify your initial investment value (the amount you initially put in the fund).
  2. Determine the final value of your investment (what your investment is worth now).
  3. Subtract the initial value from the final value.
  4. Divide the result by the initial investment value.
  5. Multiply by 100 to get the percentage.

Absolute Return Formula

The formula for calculating the absolute return in a mutual fund is:

Absolute Return = ((Final Value of Investment – Initial Value of Investment) / Initial Value of Investment) * 100%

Let’s break this down:

  • The Final Value of Investment is the value of your mutual fund investment at the end of the investment period.
  • The Initial Value of Investment is the amount you invested at the beginning of the period.
  • Subtract the Initial Value from the Final Value.
  • Divide the result by the Initial Value of the Investment.
  • Finally, multiply by 100 to convert the result into a percentage.

For instance, if you invested ₹1,00,000 in a mutual fund, and at the end of the year, your investment is worth ₹1,10,000, your absolute return would be: ((1,10,000 – 1,00,000) / 1,00,000) * 100 = 10%.

Absolute Return Vs Annualised Return

The key difference between absolute return and annualized return is that absolute return measures the total returns, while annualized return measures the return per year over the investment period.

Basis for ComparisonAbsolute ReturnAnnualised Return
MeaningMeasures total returns on investment.Measures return per year over the investment period.
Time FactorIgnores the time factor.Takes into account the time factor.
CalculationStraightforward, based on initial and final investment value.Involves compounding and the investment’s holding period.
UseUsed for short-term investments.Best for comparing long-term investments.
Benchmark ComparisonNot usually compared with a benchmark.Often compared with a benchmark.

Best Absolute Return Mutual Funds

While it is essential to do thorough research or consult a financial advisor before making any investment, here are some of the top-performing absolute return mutual funds based on past performance:

Fund Name3-Year Return (%)5-Year Return (%)
Quant Small Cap Fund Direct Plan-Growth59.50%27.59%
Axis Small Cap Fund Direct-Growth37.99%23.85%
Nippon India Small Cap Fund Direct- Growth47.40%22.64%
Aditya Birla Sun Life Medium Term Direct Plan-Growth14.24%8.82%
SBI Magnum Gilt Fund Direct-Growth5.27%8.82%
ICICI Prudential Equity & Debt Fund Direct-Growth28.46%16.84%
HDFC Balanced Advantage Fund Direct Plan-Growth27.58%15.45%

Note: The funds listed above are purely illustrative, and their past performance does not guarantee future results. Always consider your financial goals, risk tolerance, and investment horizon before investing.

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What Is Absolute Return In Mutual Fund – Quick Summary

  • Absolute return in a mutual fund refers to the total return on an investment over a set period, irrespective of market conditions.
  • It provides a clear measure of an investment’s performance, disregarding market volatility or any benchmark index.
  • An example of absolute return is when an initial investment of ₹1,00,000 grows to ₹1,20,000 over a period of a year, the absolute return is 20%.
  • To calculate the absolute return in a mutual fund, you use the formula: ((Final Value of Investment – Initial Value of Investment) / Initial Value of Investment) * 100%.
  • The key difference between absolute return and annualized return is that absolute return measures the total returns, while annualized return measures the return per year over the investment period.
  • Based on past performances, some of the top absolute return mutual funds in India are HDFC Absolute Return Fund, ICICI Prudential Absolute Return Fund, Birla Sun Life Absolute Return Fund, and more.
  • Invest in top mutual funds with Alice Blue. They can help you invest in stocks, mutual funds, & IPOs completely free of charge. 

Absolute Return In Mutual Fund- FAQs

1.What is the difference between return and absolute return in a mutual fund?

The ‘return’ on a mutual fund generally refers to the gains or losses from an investment over a specific period. On the other hand, ‘absolute return’ measures the increase or decrease of an investment over a set period, ignoring market fluctuations.

2.What is the difference between Absolute Return and CAGR?

Absolute Return refers to the total gain or loss on an investment over a specific period. Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period longer than one year.

3.What is an example of an absolute return fund?

An example of an absolute return fund is the HDFC Absolute Return Fund. This fund employs diverse investment strategies with the goal of generating positive returns regardless of market conditions.

4.How do absolute return funds work?

Absolute return funds work by using diverse investment strategies, such as investing in different asset classes or using derivatives, with the aim of generating positive returns regardless of market conditions.

5.What is the absolute return time period?

The time period for calculating absolute return can vary depending on the specific investment or the investor’s goals. It could be a month, a year, or any set duration of time.

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