What Is Annual Return

What Is Annual Return?

The Annual Return represents the cumulative gain or loss of an investment over a one-year period, expressed as a percentage. It includes both capital appreciation and dividends or interest. In the Indian context, it’s a vital measure for investors to measure the performance of stocks, bonds, mutual funds, or other investment vehicles over a year.

Contents :

What Is Annualized Return?

Annualized Return goes beyond the simple annual return by considering the compounding effect. It translates the return on investment into an annual percentage rate, allowing for the comparison of returns over different time periods. This helps in comparing investments with different time horizons on a common ground.

Annual Return Example

Consider the case of Mr. Sharma, Let’s say that he held the investment for 3 years, and his investment grew to ₹1,50,000. We can calculate the annualized return as follows: 

Initial Value = ₹1,00,000

Final Value = ₹1,50,000

Number of Years, n = 3

Annualized Return = (150000/100000)^⅓ – 1 = 14.47%

This 14.47% annualized return signifies that Mr. Sharma’s investment in the mutual fund grew at an average compound rate of 14.47% per year over the 3-year period.

How To Calculate Annualized Return?

The steps to calculate the Annualized Return are:

  • Determine the Final Value and Initial Value of the investment.
  • Divide the Final Value by the Initial Value.
  • Raise the result to the power of 1/n, where n is the number of years.
  • Subtract 1 from the result and multiply by 100 to express it as a percentage.

Annualized Return Formula

Annualized Return = (Final Value/ Initial Value)^1/n – 1

Where:

  • The final Value is the ending value of the investment.
  • The initial Value is the beginning value of the investment.
  • n is the number of years.

Difference Between Annual Return And Absolute Return

The main difference between Annual return and Absolute return is that an Annual Return calculates the growth or decline of an investment over one year, while Absolute Return measures the total return over the entire investment period, regardless of the length. 

ParameterAnnual ReturnAbsolute Return
Time PeriodFixed at one yearVaries, and could be any length
Compounding ConsiderationOften consideredMay or may not consider
ComparisonAllows for standardized comparisonSpecific to individual investment
RelevanceSuitable for annual analysisSuitable for total period analysis
InterpretationRelative to one yearTotal return over holding period
Use in Financial PlanningCommon in performance analysisOften used in hedge funds
FlexibilityLess flexibleMore adaptable to different periods

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

Types of non performing assets
Gross NPA vs Net NPA
Pivot point
What is Earnings per share
Fii Vs Dii
What is interim dividend
What is final dividend

What Is Annual Return? – Quick Summary

  • Annual Return is the total gain or loss of an investment over one year in India, including both capital gains and dividends or interest. It’s essential for evaluating the performance of various investments like stocks, bonds, and mutual funds.
  • Annualized Return goes beyond a simple annual return by considering the compounding effect. It translates return into an annual percentage, making different time periods comparable. 
  • Calculating annualized return involves a formula where the final value is divided by the initial value, raised to the power of 1/n, and subtracted by one. This calculation allows for the expression of growth over different time frames as an annual percentage.
  • The formula (Final Value/ Initial Value)^1/n – 1 is applied to calculate the annualized return, involving the final value, initial value, and number of years in the investment.
  •  Annual Return is fixed at one year and often considers compounding, allowing standardized comparisons. Absolute Return, on the other hand, can vary in time and may not consider compounding. 
  • Alice Blue can help you Invest in stocks, mutual funds, & IPOs completely free of cost. We also provide Margin Trade Funding facility, where you can use 4x margin to buy stocks i.e., you can buy stocks worth ₹ 10000 at just ₹ 2500. 

What Is Annualized Return – FAQs  

What do you mean by annual return?

Annual return refers to the total percentage gain or loss of an investment over a fixed one-year period. It considers capital appreciation, dividends, or interest and is a critical metric for investors evaluating different financial instruments.

How do I calculate my annual return?

Calculating the annual return involves finding the final value of the investment, subtracting the initial value, and dividing the result by the initial value. The formula can be expressed as (Final Value/ Initial Value)^1/n – 1.

What is the difference between annual return