Annualised Returns

What Does it Mean?

Knowing what are annualised returns is crucial because it represent the annual financial gains earned through investment over a specific period of time. It gives you the average gains earned through the investment for each year of the total investment period.

Points to Remember

Annualised returns and absolute returns are different
Absolute returns show you the total gains earned from an investment over the entire investment period
Annualised returns break these gains down for every year and give you an average

How to Calculate Annualised Returns?

Here’s the formula for calculating annualised returns:

Annualised Return = (1 + Return) ^ (1 / N) – 1

Here,

N is the total period for which you are staying invested

R is the net return you earned

What is the difference Between Absolute Returns and Annualised Returns?

The absolute return on investment is gain or loss over a specific period. On the other hand, annualised returns mean the average rate of return on investment.

Consider this example: Your investment of ₹2 lakhs grows to ₹3 lakhs in 2 years. Here, your absolute return is 50%, but your annualised return would be around 22% for each year.

Given this, absolute return tells you how much profit or loss you had within any specific period without considering the compounding factors. However, annualised returns do account for the effect of compounding and give you information on the average profit or loss every year throughout the years of investment.

FAQs on Annualised Returns

How do you calculate annualised returns?

To calculate annualised returns, first, you must calculate the overall return on the investment. You can then use this formula:

Annualised Return = (1 + R) ^ (1 / N) – 1

Here, R is the net return, and N is the total investment period.

Is annualised return the same as CAGR?

Yes. The compound annual growth rate (CAGR) is the same as the annualised return.

What is the Annualised rate of return?

It is a parameter to measure how much you have gained or lost in an investment with consideration of compounding. Using the average rate of return, you can analyse your profit or loss for any specific period.

What is the difference between XIRR and Annualised return?

Annualised return is what you can use when the investment is a lump sum. In case you invest in instalments, you must consider the Extended Internal Rate of Return, also known as XIRR. It considers compounding as well as the regular monthly investment amount. You can calculate XIRR with Excel.