One of the most crucial factors for anyone looking to invest in a mutual fund is the predicted rate of return. The rate of return is the proportion by which an investment’s value rises over its original cost. Investors will invest in a fund if the possible benefit outweighs the inherent risk.
An asset’s return over a specific period is called an absolute return. Returns are a mixed bag that may or may not be correlated with other market activities.
What is the meaning of ABS return?
The term “absolute return” refers to the actual return generated by an investment over time, independent of any comparable benchmark or another performance metric. It is also referred to as total return and is the most straightforward way to compare an investment’s performance. It doesn’t consider any other market-related factors in its computation. It can be positive or negative for any period.
When an investment has been kept for less than a year, the absolute return method of calculating the return on investment is typically utilised. Absolute return investment strategies include futures, derivatives, arbitrage, options, and alternative assets, to name a few.
How is absolute return calculated?
Calculating absolute return is straightforward and uncomplicated. Only two values are required to assess this return on investment. They are the initial investment as well as the investment’s current value. The formula to calculate the absolute return is:
Absolute Return= (Current Value – Principal Investment)/ Principal Investment * 100
For instance, X is an investor who made a mutual fund contribution of INR 1,50,000. Currently, the investment is worth INR 2,50,000. To calculate X’s absolute return, apply the formula above:
Absolute Return= (2,50,000 – 1,50,000)/ 1,50,000 * 100 = 66.66%
X earned a return of 66.66% on their mutual fund investment. However, this return needs to consider how long the investment was made. This amount would have been made to X in five or fifteen years. For any period longer than a year, mutual funds typically calculate annualised returns. Point-to-point returns do not show this.
How does absolute return work?
This return is calculated using the initial investment amount and the investment’s current value. The difference between an investment’s current worth and its starting value is known as the investment’s initial value. This return is typically used to calculate returns over terms shorter than a year. All that is needed in the case of mutual fund investments are the initial value NAV and the ending value NAV (present NAV). When calculating these returns, the fund’s investment length is unimportant.
Depending on the period and the sort of return evaluation investors are looking for, there are numerous ways to calculate their mutual fund investment returns. It is simple to calculate and is unconcerned about the status of the market. Only those willing to take risks in search of short-term and long-term profits should apply absolute return analysis.