What Is Absolute Return?

What is absolute return?

Absolute return is a simple concept that tells you the total profit and loss on your investment without taking into account any time factor. In simple words, it tells you the total return you got in your investment. It does not take into account the time period for which the investment has been made, or the benchmark against which it is compared. It helps in telling the total returns from the beginning of investment in mutual fund or any other instrument till its present time.

How does absolute return work?

Absolute return is one of the easiest and most accurate ways to calculate your investment’s performance and the returns it provides. Using this, we are able to know how much return we have received from our investment time period to the present value of the investment.

Through this return, fund managers and investors can estimate how effective their investment strategy is, and whether they should work further according to this strategy or not. Unlike other returns, profits and losses here are not compared to any benchmark, nor does it matter what the market condition has been during this period. Overall, it shows the difference between the time period of your investment and its initial value in percentage format, so that we can make a correct opinion about our investment.

When is absolute return used?

Every investor, whether long term or short term, wants to know the risks and rewards involved in the investment he makes. This type of investment is usually done in market linked instruments like mutual funds, stock portfolio etc. Using absolute returns, investors can track the returns generated by investment instruments such as mutual funds over a given period of time. A good return confirms that the invested scheme has performed well in the past, and similar performance is expected in the future. All these factors help an investor in taking long term investment decisions, and choosing a good investment instrument.

Importance of Absolute Return

Simple Calculation: Calculating Absolute Return is very easy. Any common citizen or investor can easily understand this. For investors who do not have much knowledge of market ratios and financial formulas, this is a great way to know the performance of their investments.

Portfolio Diversification: Absolute return refers to the simple return of an investment without any fundamental or benchmark factors. Keeping this in mind, the investor can check his various investment returns and take appropriate steps to diversify the portfolio.

Short Term and Long Term Goals: Absolute Return calculates returns without taking the time factor into account. In this way, it can be beneficial for both long term and short term investors. This helps them in taking future decisions related to their investment by looking at its current value.

Effect of market volatility: Market volatility is not taken into account in the calculation of absolute returns. It only works to show positive or negative returns while making the investment returns stable. Thus, it is beneficial for those investors who do not have much knowledge of various market factors and consider total returns as the benchmark for their investment decisions.

How to calculate absolute return?

Absolute returns can be calculated very easily. For this, the principal value of the investment is subtracted from the current value of the investment, after which the value obtained after dividing it by the current value is the absolute value. For example, you invested Rs 1 lakh in a mutual fund on January 1, 2023, the value of which has increased to Rs 1 lakh 30 thousand in December 2024. Your total profit in this case was Rs 30 thousand. By converting this into percentage, we can find out the absolute value, for which the formula given below is used.

Absolute return’s formula

Absolute Value = ((Current price – Purchase price) / Purchase price) * 100

Using the example values above:

Absolute Value : ((130,000-100,000)/100,000)*100 = 30%

Difference between absolute and annual return

Absolute Return	Annual Return
Absolute return reflects the percentage change in the value of an investment over a specified period of time.	It shows the annual return on investment for a specified period of time, which also includes compounding returns.
It is easier to understand and calculate than annual returns.	It is more complex than absolute return.
With its use, the returns received from an investment in different time periods can be ascertained.	With its use, the future performance of the investment is estimated.
It can be used for both short term and long term investments, and it does not take investment risk into account.	For short investment periods the value given by it is sometimes not accurate.

Conclusion