What is Absolute Return
Absolute return refers to the measure of the gain or loss that an investment achieves over a specific period. Unlike relative returns, which compare performance against a benchmark, absolute return focuses solely on the actual return of the investment, irrespective of market performance. It provides a clear and straightforward picture of how much an investment has earned or lost in absolute terms.
Here is a simple breakdown of how absolute returns work:
Calculation: Subtract the initial investment from the final value, divide by the initial investment, and multiply by 100 to get the percentage return.
In essence, absolute returns give you a clear picture of your investment's growth without comparing it to any external factors.
Relative returns measure an investment's performance against a benchmark or index, such as the Nifty 50. The goal is to outperform this benchmark, and success is gauged by comparing the fund's return to that of the benchmark. For instance, if a fund returns 10% and the benchmark returns 8%, the relative return is 2%.
In contrast, absolute returns focus on the raw performance of the investment, without any benchmark comparison.
While relative returns are useful for comparing performance to peers, absolute returns provide a clearer picture of the actual gains or losses experienced by the investment.
To calculate the absolute return, the formula is:
Absolute Return = [(Current Value – Initial Investment) / Initial Investment] * 100
For example, an investor starts with ₹1,00,000 and ends the year with ₹1,20,000. The absolute return would be calculated as:
Absolute Return = [(1,20,000 – 1,00,000) / 1,00,000] * 100 = 20%
This means the investment grew by 20% over the year.
How Absolute Return Works
Here is a simple breakdown of how absolute returns work:
Calculation: Subtract the initial investment from the final value, divide by the initial investment, and multiply by 100 to get the percentage return.
In essence, absolute returns give you a clear picture of your investment's growth without comparing it to any external factors.
Relative and Absolute Returns
Relative returns measure an investment's performance against a benchmark or index, such as the Nifty 50. The goal is to outperform this benchmark, and success is gauged by comparing the fund's return to that of the benchmark. For instance, if a fund returns 10% and the benchmark returns 8%, the relative return is 2%.
In contrast, absolute returns focus on the raw performance of the investment, without any benchmark comparison.
While relative returns are useful for comparing performance to peers, absolute returns provide a clearer picture of the actual gains or losses experienced by the investment.
Example of Absolute Return
To calculate the absolute return, the formula is:
Absolute Return = [(Current Value – Initial Investment) / Initial Investment] * 100
For example, an investor starts with ₹1,00,000 and ends the year with ₹1,20,000. The absolute return would be calculated as:
Absolute Return = [(1,20,000 – 1,00,000) / 1,00,000] * 100 = 20%
This means the investment grew by 20% over the year.
