Understanding mutual fund returns is key. You'll see terms like "absolute return," "annualized return," and "CAGR" . Let's define these. Absolute return is the simplest measure. It shows the total percentage gain or loss over a specific period, regardless of time.

Formula:

Absolute Return = ((Current NAV − Initial NAV) / Initial NAV) × 100

Example:
Suppose you invested in a mutual fund when its Net Asset Value (NAV) was PKR10. After 6 months, the NAV rose to PKR 12.

Absolute Return = ((12 − 10) / 10) × 100 = 20%

Your investment grew 20% in six months. Absolute return is good for short-term results. It doesn't show annual performance.

What is Annualized Return?

Annualized return converts the absolute return of an investment to an annual rate, assuming the investment period is less than one year. It helps you compare the performance of different investments over different short periods.

Formula (for periods less than one year):

Annualized Return = ((1 + Absolute Return) ^ (365 / Number of Days Held) − 1) ×100

Example (continuing from above):
You earned an absolute return of 20% in 6 months (182.5 days).

Annualized Return = ((1 + 0.20) ^ (365 / 182.5) − 1) × 100
= (1.20^2 − 1) × 100 = (1.44 − 1) × 100 = 44%

This implies that if the fund continued to perform at the same rate, it would yield 44% over a full year.

What is CAGR (Compounded Annual Growth Rate)?

CAGR, or Compound Annual Growth Rate, shows the average annual growth of an investment over a period longer than one year, assuming profits are reinvested. It provides a consistent annual growth rate, offering a more accurate comparison of long-term performance.

Formula:

CAGR = ((Ending Value / Beginning Value) ^ (1 / Number of Years) − 1) × 100

Example:
You invested PKR 10,000 in a mutual fund. After 3 years, your investment grew to PKR 15,000.

CAGR = ((15,000 / 10,000) ^ (1 / 3) − 1) × 100
= (1.5 ^ (1 / 3) − 1) × 100 = (1.1447 − 1) × 100 = 14.47%

This means your investment grew at an average annual rate of 14.47% over the three years.

Why Do These Matter?

Absolute Return: Ideal for quickly assessing short-term profits or losses.

Annualized Return: Useful for comparing the short-term performance of different funds on an annual basis.

CAGR: Best for comparing mutual fund performance over longer periods, providing a clear picture of average annual growth.

Understanding these terms improves your analysis of mutual fund performance and helps you make better financial decisions.

Learn the difference between Absolute Return, Annualized Return, and CAGR to evaluate mutual fund performance and make smarter investment decisions.

‍

‍