Mutual funds are a good option to invest your money in, but in order to decide which one is the best, you must know how to measure their performance. Various metrics are used by investors to understand how successful a fund is and to evaluate other opportunities. Absolute return is one of those indicators, it indicates the change in a mutual fund’s value directly in percentage terms, thus making investment monitoring more transparent and easier. To know how absolute return works and why it’s useful for evaluating investments, read on.
What Is Absolute Return in a Mutual Fund?
Absolute return in mutual funds is the easiest way to recognise how much money has been gained or lost from the initial investment in percentages. Compared to other measures, which measure the performance against a benchmark or the overall market, the absolute return just shows the rise or fall of the mutual fund to the investor, thus making it simple to grasp.
This indicator is perfect for comparing returns over any duration, whether it is a few weeks, several months, or a whole year. It provides investors with a direct and convenient method to keep up with the real profit or loss of their mutual fund, without having to go through a lot of calculations or jargon.
Absolute return, concentrating only on the actual performance of the fund, makes investment tracking less complicated and more transparent to investors, who thereby feel more at ease when they make their decisions based on clear-cut outcomes.
How Absolute Return in Mutual Funds Is Calculated
Absolute return in mutual funds is calculated as the percentage change of an investment’s worth over a specific period. The process only looks at the increase or decrease from the original amount invested to the present or final value, without taking into account the duration the investment was held or any benchmark comparison.
The figure indicates in a basic way the amount by which the investment has gone up or down in the selected time period. Such a method is appropriate for a short holding period, giving a straightforward performance overview. The procedure is to find the difference between the initial and final values and show it as a percentage of the initial investment, thus giving a simple absolute return or loss indicator.
Formula & Example of Absolute Return
The absolute return in mutual funds is calculated using the following formula:
Absolute Return (%)= ((Final Value of Investment−Initial Value of Investment) / Initial Value of Investment) ×100
This formula provides a straightforward way to determine how much an investment has grown or declined over a chosen period, regardless of benchmarks or time held.
To illustrate, consider the Motilal Oswal Midcap Fund.
On 2nd July 2025, the Net Asset Value (NAV) was ₹99.6461 per unit, which has gone up to ₹101.9900 per unit by 29th August 2025.
If an investor purchased units worth ₹10,000 at ₹99.6461 per unit on 2 July 2025, the total number of units acquired would be:
Units Bought = ₹10,000 / ₹99.6461 = 100.36
On 29 August 2025, the value of these units at ₹101.9900 per unit would be:
Final Value = 100.36 × ₹101.9900 = ₹10,227.89
The absolute return in this case is:
(10,227.89 − 10,000 / 10,000) × 100 = 2.28%
The change in NAV is the increase in the investment. The absolute return over nearly two months is approximately 2.28%.
This number shows the simple increment, providing investors with a clear indication of how much their investment has increased in this brief period. Such calculations serve as handy tools for gauging the performance of mutual funds in the short term.
Absolute Return vs Annualised Return (CAGR)
When evaluating mutual fund performance, understanding the difference between Absolute Return and Annualised Return (CAGR) is essential. Each metric offers unique insights that can help investors make informed decisions.
| Feature | Absolute Return | Annualised Return (CAGR) |
| Definition | Shows the total increase or decrease over any period | Presents the average yearly growth, factoring in compounding |
| Time Consideration | Ignores the length of time involved | Takes into account how long the investment lasts |
| Suitable Context | Best for assessing short-term or specific timeframes | More appropriate for evaluating long-term results |
| How It’s Calculated | Uses the change from starting to ending value | Calculates growth as if the return was earned evenly each year |
| Benchmarking | Does not rely on any benchmark for measurement | Also independent, but typically used for cross-fund comparisons |
| What It Reveals | Directly states the percentage gained or lost | Shows a steady rate of growth that smooths out yearly changes |
When Should You Use Absolute Return for Evaluation?
Absolute return is most suitable for evaluating mutual fund performance over shorter periods, typically less than a year. To illustrate, an investor wanting to see the progress of their investment in the last month, quarter, or any other time interval would find the absolute return to be the easiest way of giving the value of the investment as a gain or a loss.
It is instrumental in keeping up with the short-term variations, comparing funds during the same period, and evaluating investments without reference to market benchmarks. Absolute return could be utilised in performance reviews for weekly, monthly, and quarterly investments, thus enabling a convenient method of performance analysis from one point to another.
On the other hand, absolute return does not give a timeline showing when the growth occurred, nor does it indicate how the fund performed relative to the market. For extended periods or when comparing with market indices, other metrics may be more suitable.
Limitations of Absolute Return
Even though absolute return is an easier-to-understand and easier-to-calculate method, it still faces different problems as a key mutual fund evaluation criterion:
- Ignore Timeframe: This indicator doesn’t account for the time taken to achieve profit or loss, as it does not annualise returns, which may lead to misleading comparisons between investments held for different periods.
- No Benchmark Reference: It does not provide any indication as to whether a fund has gone beyond or fallen short of the market or similar funds, thus giving less context for the evaluation.
- Risk Unawareness: The absolute theme of return does not mirror the level of risk taken to get the results, meaning that if a high return is attained, it may sometimes be accompanied by high risk, but unmeasured.
- Restricted Comparability: This measure is not appropriate for reflecting the performance of different funds or asset types during various time intervals, as time and compounding have not been taken into account.
- Overlooks Inflation: There is no adjustment for inflation; hence, the return figure may not be a true indication of the increase in value or purchasing power.
Absolute Return vs Relative Return
Understanding the absolute and relative returns is crucial when analysing mutual fund performance, as each returns serve different functions in determining the fund’s performance.
| Feature | Absolute Return | Relative Return |
| Definition | Shows the total gain or loss on an investment over a specific period, irrespective of external factors | Indicates how a fund has performed compared to a benchmark or index over the same period |
| Benchmark Use | Does not compare performance to any external benchmark; only the investment itself matters | Compares the fund’s results to a selected benchmark to judge outperformance or underperformance |
| Measurement | Focuses on the precise increase or decrease in value, expressed as a percentage | Measures the difference between the fund’s return and the benchmark’s return |
| Simplicity | Straightforward and ideal for assessing stand-alone gains or losses | More complex, requires additional analysis and benchmarking |
| Use Case | Suitable for investors wanting a direct snapshot of profit or loss | Valuable for those assessing how well a fund manager is beating the market |
Importance of Benchmark Comparison
Benchmark comparison is an essential point in mutual fund assessment to figure out the level of performance that the fund has achieved. Benchmarks, often well-known market indices, represent either the overall market or a specific sector and are thus used as a standard for evaluating performance.
Comparing a fund’s returns to the benchmark will indicate whether the fund has exceeded or fallen short of the broader market. This brings in openness, making it easier for investors to judge different funds on equal terms and directly.
Learning how a fund relates to the benchmark aids in establishing the competency of the management. Consistent overperformance can indicate a strong strategy, whereas continuous underperformance might require a deeper investigation. By employing benchmarks, investors can measure the level of risk and reward in the right setting and make wiser financial choices.
Conclusion
Absolute return gives a simple and easy-to-understand indication of how a mutual fund’s net asset value has changed during a given time. It is, however, a limited measure as it doesn’t take into account the duration of the investment, the risk, or even the benchmarks of the market. Therefore, absolute return should be used alongside other metrics to gain a complete understanding of a fund’s overall performance.
FAQs
Absolute return in a mutual fund refers to the percentage increase or decrease in investment value over a certain period. For example, if ₹10,000 grows to ₹11,200 in a year, the absolute return is (11,200-10,000 / 10,000) × 100 = 12%.
The absolute return in mutual funds is the final value of the investment minus the initial value of the investment, divided by the initial value, and then multiplied by 100 to convert the result to a percentage.
Comparing a benchmark is significant as it provides a standard for judging whether a mutual fund has done better or worse than the wider market, thus enabling the objective analysis and more meaningful evaluation of the fund’s performance.
Absolute return provides a simpler account of profit or loss over a specific period, but it does not consider benchmarks, risk, or the duration of the investment, so it may not be sufficient on its own to evaluate mutual fund performance.
Absolute return is a measure of the total return (including both gains and losses) that an investment has had over a specific period, while relative return shows how well the investment did against a benchmark or an index, thus giving information on whether the investment was above or below the broader market.
