When you start investing in mutual funds, one of the first things you come across is “returns.” And very quickly, another term follows, annualised returns.
At first glance, it sounds technical. But once you understand it, it becomes one of the most useful ways to compare your investments.
In this blog, let us break it down in a simple way so you can actually use it while making investment decisions.
Understanding Mutual Fund & Returns
A mutual fund is basically a pool of money collected from many investors, which is then invested in different asset classes like stocks, bonds, gold, etc. This money is managed by a professional fund manager.
These investments then give you returns, which further earn returns, so that your money grows over time.
Before jumping into annualised returns, let us quickly understand what “returns” mean.
Returns are simply the profit or loss you earn from your investment. For example, you invest ₹1 lakh, and after 2 years, it becomes ₹1.44 lakh
Your total return is ₹44,000 or 44%.
Now here is the catch: this 44% does not tell you how fast your money grew each year. That is where annualised returns come in.
What are Annualised Returns
Annualised returns tell you the average yearly return your investment has generated over a period of time.
Instead of looking at total growth, it converts the return into a per-year growth rate, assuming the investment grew at a steady pace.
Let us understand the concept with a simple example;
- Investment: ₹1,00,000
- Value after 2 years: ₹1,44,000
- Total Return: 44%
Now, the annualised return will tell you the average yearly growth rate. In this case, it is approximately 20% per year, not 22% (which many people assume by dividing 44% by 2).
Annualised returns consider compounding, which means the investment amount earns returns in the first year, and also earns returns in the second year
So, your money grows on both your original investment and your past gains. That is why simply dividing the total return by the years gives an incorrect picture.
Importance of Annualised Returns
1. Helps Compare Different Investments
Let us say fund A gave 50% return in 5 years, and fund B gave 30% return in 3 years. How will you decide which one is better?
At first glance, Fund A looks better. But when you annualise:
- Fund A gives 8.4% per year
- Fund B gives 9.1% per year
Now the picture changes, since annualised returns allow you to compare investments fairly, even if the time periods are different.
2. Shows the True Picture
Total returns can sometimes be misleading. For example,60% return over 10 years sounds good, but when annualised, it is only about 4.8% per year, which is barely beating inflation. Annualised returns help you understand the real earning power of your investment.
3. Useful for Long-term Planning
If you are investing for goals like:
- Retirement
- Buying a house
- Children’s education
You need to know how your money grows year by year, not just overall. Annualised returns help you estimate whether you are on track or do you need to work on your investments.
Read Also: Mutual Funds vs Individual Stocks: Which Investment Option Is Better for You?
Annualised Returns vs. Absolute Returns
This is where many investors get confused.
Absolute returns show total gains or losses, and are considered best for short-term investments (less than 1 year). For example, you invest ₹1 lakh, and it becomes ₹1.1 lakh in 6 months. This is 10% absolute return.
Formula for Annualised Returns
AR = (Final Value / Initial Investment)^1/n – 1
Where,
Final value = Value of your investment at the end
Initial Investment = Amount you invested
n = number of years
Example
Let us understand this with an example:
Suppose you invested ₹100,000, and after 3 years it became ₹172,800
If we apply the above formula:
₹172,800 / ₹100,000 = 1.728
We know that n = 3
Now, Annualised Return will be (1.728)^⅓ – 1, which is equal to 20%
Therefore, your investment grew at an average rate of 20% per year, not 72.8%.
Where to Check Annulised Returns
1. Use Investment Apps or Platforms
If you are using apps to invest in Mutual Funds, you will find annualised returns in the app itself. Platforms like Pocketful, Groww, Zerodha Coin, etc. make it very easy.
You just need to
- Open an account with the Pocketful app
- Search for the mutual fund
- Open the fund details, and look for returns. You will see numbers like: 1-year return, 3-year return, 5-year return
2. Check the Fund House Website
You can also go directly to the mutual fund company’s website.
For example:
- HDFC Mutual Fund
- ICICI Prudential Mutual Fund
- SBI Mutual Fund
On the fund page, look for a section called “Performance”.
3. Use Financial Websites for Comparison
If you want to compare multiple funds, websites are very helpful. You can check: Value Research, Morningstar, Moneycontrol
Using these websites, you can compare funds side by side and see long-term annualised returns.
Things to Keep in Mind
1. Always Compare Similar Funds
Make sure you are comparing the same type of funds. For example:
- Large-cap vs large-cap
- Mid-cap vs mid-cap
- Debt vs debt
Comparing a debt fund with an equity fund does not make sense because the risk levels are completely different.
2. Do not look at Just One Number
Annualised return is important, but it should not be the only thing you check. Also, look at consistency over time, riskometer, and expense ratio. A fund giving a steady 11% is often better than one jumping between 20% and -10%.
3. Try to interpret what you are seeing
Keep this simple rule in mind: 1-year return is absolute, and 3-year, 5-year, and 10-year returns are annualised. So do not compare the 1-year return of one fund with the 5-year return of another. This won’t give you the right picture.
Read Also: Mutual Funds vs Direct Investing: Differences, Pros, Cons, and Suitability
Conclusion
At the end of the day, annualised returns help you cut through the noise. Instead of getting impressed by big total returns, you get to see how efficiently your money has actually grown over time.
It brings a sense of clarity. You can compare funds better, set more practical expectations, and avoid getting carried away by short-term performance.
But always remember to look at consistency, risk, and whether the investment fits your goals. Use it to stay informed, but combine it with logic and long-term thinking. For more market insights and learning, download Pocketful – offering zero brokerage on delivery, mutual funds, and IPOs through an easy-to-use platform.
Frequently Asked Questions (FAQs)
Is annualised return the same as CAGR?
Yes, both mean the same thing in most cases.
When should I use annualised returns?
Use annualised returns when your investment period is more than one year.
Can annualised returns be negative?
Yes, if your investment loses money over time.
Do mutual fund apps show annualised returns?
Yes, most apps and websites show it clearly.
Is a higher annualised return always better?
Not always. You should also look at risk and consistency.
