Meaning of Absolute Returns: A Simple Explanation

Investing in mutual funds? Then you’ve probably come across the term absolute returns at some point. But what exactly is absolute returns meaning and how does it impact your investments?  

Read on to understand what is absolute return in mutual funds and other important facts.  

​​​Understanding Absolute Returns in Mutual Funds 

​​​Absolute return refers to the total percentage gain or loss on an investment over a specific period. Unlike relative return, which compares performance to a benchmark, absolute return focuses solely on how much your investment has grown or shrunk. 

Check the table below to understand the difference between the two: 

Feature	Absolute Return	Relative Return
Measures	Total gains/losses in percentage	Performance compared to a benchmark
Timeframe	Fixed (e.g., 1 year, 3 years)	Continuous comparison
Benchmark Dependence	Not required	Required
Simplicity	Easy to understand	More complex

​​​How is Absolute Return Calculated? 

The formula for absolute return is straightforward: [(Current Value / Initial Investment Value) – 1] X 100 

Example: 

You invest ₹1 lakh in a mutual fund. After 2 years, your investment grows to ₹1.5 lakh. Using the formula, your absolute return is 50%. Here’s a table to show the projections.  

Initial Investment	Final Value	Absolute Return
₹1,00,000	₹1,50,000	50%
₹2,00,000	₹2,50,000	25%
₹50,000	₹60,000	20%

​​​Absolute Return vs. CAGR (Compounded Annual Growth Rate) 

Absolute returns only tell you the overall gain, while the CAGR considers the time factor. 

Feature	Absolute Return	CAGR
Time Consideration	No time factor	Time-based growth
Simplicity	Easy to calculate	More accurate for long-term investments
Suitable for	Short-term view	Long-term investment analysis

Why Should You Care About Absolute Returns? 

​​​Understanding absolute returns helps you:  

• Evaluate the total profit or loss on your investment 
• Compare different mutual funds on a basic level 
• Make informed decisions about exiting or reinvesting in funds 

However, it does not tell you the annualised return, so if you’re comparing funds over different time periods, CAGR may be more useful. 

When is Absolute Return Useful? 

​​​Absolute returns in mutual funds work best when: 

• You’re investing for a short period (less than 3 years) 
• You want a direct, easy-to-understand number 
• Comparing two funds launched at the same time 

It’s less useful when: 

• Comparing funds over different timeframes 
• Assessing long-term wealth creation 
• Evaluating performance in volatile markets 

Absolute Return in Different Market Conditions 

These returns change as per the market, be it bearish or bullish. Here’s how.  

Market Condition	Absolute Return Impact
Bull Market (Rising)	Higher absolute returns
Bear Market (Falling)	Negative absolute returns
Stable Market	Moderate absolute returns

If the market is booming, absolute returns look great. But if there’s a downturn, absolute returns can be misleading without additional context. 

Limitations of Absolute Returns 

While absolute returns are easy to calculate, they come with a few drawbacks:  

• They don’t consider time—A 50% return in 1 year is very different from 50% in 5 years.
• No risk assessment—Absolute return doesn’t reflect market volatility.
• Can be misleading—A 20% gain in a booming market isn’t as impressive as it sounds. 

To get a clearer picture, always compare absolute returns with other metrics like CAGR, risk-adjusted returns and standard deviation. 

Absolute Returns in Different Types of Mutual Funds 

Different mutual funds yield different absolute returns based on their asset allocation and investment strategy. 

Type of Mutual Fund	Expected Absolute Return (Approx.)
Equity Funds	12-15% over 5+ years
Debt Funds	6-9% over 3-5 years
Hybrid Funds	8-12% over 5 years
Liquid Funds	3-5% for short durations

Equity funds generally offer higher absolute returns over the long term but with more risk. Debt funds provide stability, while liquid funds are best for short-term needs. 

Also Read: Types of Mutual Funds in India 

How to Use Absolute Returns in Your Investment Decisions? 

• Short-term Investments: Absolute return works well if you’re investing for a short period.
• Comparing Funds: If two funds started at the same time, absolute return gives a quick performance snapshot.
• Tracking Profits: Helps you see your gains in simple percentage terms. 

Absolute return is a simple but powerful tool to measure your investment’s growth. While it’s easy to calculate, always consider other metrics like CAGR and relative returns for a holistic view. If you’re planning long-term investments, don’t just look at absolute returns in mutual funds—think bigger. 

While investing in a mutual fund, the longer you stay invested, the better your returns will be. This is why Fibe’s Loan Against Mutual Funds allows you to stay invested even when you need urgent funds. Using this option, you can arrange up to ₹10 lakhs with a 100% digital application and hassle-free application. Download the Fibe App to apply now.  

FAQs on Absolute Returns 

How is absolute return calculated for a mutual fund? 

Absolute return is calculated using the formula: 

(Current Value – Initial Investment)/ Initial Investment X 100 

It simply measures the percentage gain or loss on your initial investment over a set period. 

What’s the difference between absolute return and total return? 

Absolute return measures just the price appreciation, while total return includes dividends, interest and distributions received during the investment period. 

Does absolute return account for dividends or distributions? 

No, absolute return only considers the change in price. If you want a more comprehensive measure, look at total return, which includes dividends and reinvested earnings.