Our sole reason to invest is to create wealth through the investment choices we have made.
Absolute returns are one of the many parameters which help you see the growth of your money. It provides you with point-to-point returns which tell you the rate at which an asset has appreciated or depreciated over time.
Absolute return is independent of any benchmark and does not depend on any factor other than the asset’s value as against a relative return which measures a fund’s performance compared to a benchmark or the overall market performance.
To understand it better, let’s take an example, say you invest ₹1,000 and after 3 years it grows to ₹1,500. The absolute return would be 50 percent, indicating a profit of ₹500 on an investment of ₹1,000. Here, there is no calculation of annualised returns or the CAGR. Even if it would take 10 years for the returns to move from ₹1,000 to ₹1,500, the absolute return would still be 50 percent.
Absolute returns aim at profits from the rise and fall of share prices. However, it has one disadvantage. Absolute returns do not give a picture of the fund’s volatility nor does it consider the time period, therefore, making the number appear larger. CAGR or Compound Annual Growth Rate is quite different from absolute returns as it represents an annual growth rate over a period of time. It gives you the rate at which the investment would have grown annually, had it compounded at the same rate each year.Absolute returns aim for profits from the rise and fall of share prices and stock market prices. So, it is important to analyse a fund’s growth and access other measures like CAGR, annualised returns etc, in addition to absolute returns.