The world of investments can be complex, filled with various terms and metrics that can leave even seasoned investors scratching their heads. One such concept that deserves closer examination is absolute return. Understanding what is absolute return in mutual fund, absolute return meaning is crucial for making informed decisions about your mutual fund investments.
Absolute Return Meaning in Mutual Fund
In its most basic form, absolute return meaning refers to the total gain or loss generated by an investment over a specific period. It’s a straightforward measure, expressed as a percentage that tells you how much your investment has grown (or shrunk) since you bought it. Unlike other metrics, what is absolute return in mutual fund doesn’t take into account the investment period or compare your returns to any benchmark. It simply reflects the absolute return meaning: the net profit or loss you’ve experienced. This makes absolute return a useful metric when evaluating short-term mutual fund performance, typically less than a year.
What is Absolute return and Annualized Return in Mutual Fund?
While absolute return meaning potrays a clear picture of your investment’s performance at a specific point in time, it doesn’t account for the time factor. This is where annualized return comes into play. Annualized return calculates the average rate of return per year over a given investment period. It considers the compounding effect, which means it factors in how your earnings from previous years are reinvested and generate additional returns.
Here is a table comparing what is absolute return and annualized return in mutual fund:
| Feature | Absolute Return | Annualized Return |
| Focus | Total gain/loss at a specific point | Average rate of return per year |
| Timeframe | Doesn’t consider time | Considers investment period |
| Compounding | Not factored in | Accounts for compounding effect |
| Benchmark | Not compared | Compared to a benchmark index |
| Usefulness | Simple measure of overall performance | Provides context for long-term growth |
What is Absolute Return in Mutual Fund?
The concept of what is absolute return in mutual fund holds particular significance in the realm of mutual funds. Unlike traditional mutual funds that strive to outperform a benchmark index (like the S&P 500), absolute return mutual funds focus on generating positive returns regardless of market conditions. These funds employ various strategies to aim for consistent and positive results, including investing in a mix of assets with low correlation (meaning their prices don’t necessarily move in tandem with the overall market) and employing short-selling techniques.
Calculating Absolute Return in Mutual Funds
Calculating the absolute return of your mutual fund investment is a straightforward process. Here’s the formula:
| Absolute Return(%) = [(Selling Price – Purchase Price) / Purchase Price] x 100 |
For example, if you invested Rs. 10,000 in a mutual fund scheme and sold your units for Rs. 12,000, your absolute return would be:
| Absolute Return(%) = [(12,000 – 10,000) / 10,000] x 100 = 20% |
It means your investment has grown by 20% since you bought it.
Benefits of Focusing on Absolute Return in Mutual Funds
There are several advantages to considering absolute return when evaluating mutual fund performance:
- Simplicity: Absolute return is a clear and easy-to-understand metric that doesn’t require complex calculations.
- Focus on Outcomes: It emphasizes the profit or loss you’ve earned, regardless of market fluctuations.
- Risk Management: Absolute return-oriented funds often prioritize capital preservation and may suit investors seeking lower volatility.
Limitations of Absolute Return in Mutual Funds
While absolute return offers valuable insights, it also has limitations:
- Limited Context: It doesn’t account for the investment timeframe or market conditions.
- Benchmark Comparison Missing: It doesn’t tell you how your fund performed relative to the broader market.
Choosing the Right Mutual Fund Based on Absolute Return
When selecting a mutual fund, your investment goals and risk tolerance should be the primary driving factors. If capital preservation and consistent returns are your priorities, absolute return mutual funds might be suitable. However, it’s crucial to carefully assess the fund’s strategy, historical performance, and fees before making an investment decision.
Conclusion
In conclusion, understanding absolute return meaning empowers you to assess your mutual fund investments effectively. By considering both what is absolute return and annualized return in mutual fund , you gain a holistic view of your fund’s performance and its ability to generate consistent returns irrespective of market conditions. If capital preservation and positive returns are your priorities, and want to explore what is absolute return in mutual fund absolute return mutual funds, like those offered by SMC Global Securities, a reputed Commodity Trading Advisor (CTA), it could be a compelling option for your portfolio.
FAQs on Absolute Return Meaning
1. What is absolute return in simple terms?
Absolute return is the total profit or loss you make on your investment, expressed as a percentage. It tells you how much your money has grown (or shrunk) since you invested it in a mutual fund scheme.
2. How is absolute return different from annualized return?
Absolute return focuses on the total gain or loss at a specific point in time. Annualized return, On the other hand, annualised return considers the average rate of return you earn every year over the entire investment period. It considers the compounding effect, which means your earnings from previous years are reinvested and generate additional returns.
3. Why is absolute return necessary in mutual funds?
Unlike traditional mutual funds that chase market highs, absolute return funds aim to deliver positive returns regardless of market conditions. It can be attractive for investors seeking consistent growth and lower risk.
4. How do I calculate the absolute return of my mutual fund investment?
It’s easy! Here’s the formula:
Absolute Return(%) = [(Selling Price – Purchase Price) / Purchase Price] x 100
Just plug in the numbers, and you’ll get your absolute return as a percentage.
5. Should I only consider absolute return when choosing a mutual fund?
No, absolute return is just one piece of the puzzle. To make a well-informed decision, consider the fund’s risk profile, strategy, and how it compares to a benchmark index (relative return).
Reference :
http://www.mutualfundssahihai.com/en/what-absolute-return
https://aliceblueonline.com/annual-return-vs-absolute-return/
