Good Annual Return in Mutual Funds: A Long-Term Investor’s Guide
If you invest in mutual funds or are planning to, you’ve probably heard terms like “Annualised Return” or “CAGR”. But do you really know what they mean?
And why are they so important?
Let’s break it down in simple language—so that the next time you check a fund’s performance report, there’s no confusion.
What is Annualised Return?
Annualised Return means the average return an investment has earned each year over a period of time.
Example:
If you invest ₹10,000 in a fund, and after 3 years it becomes ₹13,000, your total return is 30%.
But how much return did you earn each year on average?
That’s what Annualised Return tells you.
It helps you understand how fast your money has grown annually.
CAGR vs Annualised Return – What’s the Difference?
Many people think CAGR (Compound Annual Growth Rate) and Annualised Return are the same – and honestly, they’re very similar.
CAGR uses a formula to calculate how much your money has grown year by year, giving you a realistic picture.
Annualised Return works in a similar way, especially when you're looking at the entire investment tenure.
Absolute Return vs Annualised Return – Which One Should You Use?
| Type | What It Shows | When to Use |
|---|---|---|
| Absolute Return | Total return – how much you earned overall | If your investment is less than 1 year |
| Annualised Return | Average return per year | If your investment is more than 1 year |
How to Calculate Annualised Return?
Here’s the formula:
But don’t worry—you don’t need to calculate it manually.
Almost all mutual fund platforms and apps show this figure for you.
You just need to understand what this number means.
Why Is Annualised Return Important?
-
Fair Comparison: Helps you compare different funds easily
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Reality Check: Unlike hype-based returns, it shows realistic growth
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Long-Term Planning: Crucial for goal-based investing (like education or retirement)
Conclusion: Understand Returns Before You Invest!
Nowadays, many people pick a fund just by looking at past performance.
But it’s essential to understand how those returns are measured.
Annualised Return helps you know whether a fund is consistently performing or just had a one-time spike.
A smart investor is one who doesn’t just chase returns—but understands the process behind them.
Bonus Tip:
Whenever you select a mutual fund, always check these 3 things:
-
Annualised Return
-
Expense Ratio
-
Risk Level
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