What is Absolute Return in Mutual Fund And Why It Matters

Absolute return in mutual funds refers to the total percentage gain or loss on an investment over a specific period, without comparing it to a market benchmark or index. It focuses purely on the growth or decline of your investment in numerical terms, showing how much your investment has increased or decreased in value. For example, if you invest ₹10,000 and it grows to ₹12,000 in a year, your absolute return is 20%.

Why Does Absolute Return Matter?

1. Clarity on Performance: Absolute return provides a clear picture of how much profit (or loss) your investment generated. This is particularly useful for investors who are focused on actual gains rather than how their investment compares to the broader market.
2. Risk Assessment: It helps in understanding the raw performance of an investment, which can aid in assessing risk, especially in volatile markets where relative returns may not give a complete picture​
3. Simple to Calculate: It is easy to calculate by using the formula:Absolute Return=(Current Value−Initial InvestmentInitial Investment)×100\text{Absolute Return} = \left( \frac{\text{Current Value} – \text{Initial Investment}}{\text{Initial Investment}} \right) \times 100Absolute Return=(Initial InvestmentCurrent Value−Initial Investment​)×100This makes it an accessible metric for beginner investors.

Absolute Return vs. Relative Return

While absolute return measures direct growth, relative return compares the performance of a fund against a benchmark, such as the Nifty 50 or Sensex. Absolute returns are useful for understanding the specific gains of your investment, whereas relative returns provide context on how well the fund performed in relation to the market​.

FAQ

1. What is the absolute return in a mutual fund?
   Absolute return is the total percentage change in the value of an investment over a certain period, without comparing it to any benchmarks or market indices.
2. How is absolute return calculated?
   It is calculated using the formula:Absolute Return=(Current Value−Initial InvestmentInitial Investment)×100\text{Absolute Return} = \left( \frac{\text{Current Value} – \text{Initial Investment}}{\text{Initial Investment}} \right) \times 100Absolute Return=(Initial InvestmentCurrent Value−Initial Investment​)×100
3. How is absolute return different from CAGR?
   While absolute return gives total gains or losses over a period, CAGR (Compound Annual Growth Rate) measures the average yearly growth rate of an investment over multiple years​.
4. Is absolute return a good metric to assess mutual funds?
   Yes, it is helpful for assessing performance in isolation, but it should be used alongside other metrics like relative return or CAGR for a holistic view.
5. Can absolute return be negative?
   Yes, absolute return can be negative if the investment decreases in value from its initial investment​.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. Always consult with a financial professional before making investment decisions.