How to Calculate Annualized Return on Investments

How to Calculate Annualized Return on Investments ?

Previously, we had discussed about the Absolute Return on Investment, to calculate how our Invested money performing and seen how it differ from in terms of rupees as Absolute. Here, we can see to calculate the Annualized Returns on our Investments.

Annualized Return can be computed as Percent (% p.a) per Annum. We can measure the returns by these method, is the better and accepted way to measuring the Investment Return. The basic purpose of Annualized Return is to standardize the investment period as though each investment was made only for One year. It helps to ease comparison of investments across Time periods.

Annualized Returns can be denoted as [ % p.a ], otherwise, it is usually an Absolute Non-annualized return. 


Annualized Return on Investment:

(Return on Investment / Original Investment) X 100 X (1 / Holding period of investment in years)

Or 

in simple terms,  ((End value - Beginning value) / Beginning value)  X 100 X (1 / Holding period of investment in years)

To annualize, the absolute rate of return is multiplied by the following factor:

• 365 / Number of days that the investment was held
• 12 / Number of months that the investment was held
• 1 / Number of years the investment was held

If Akhil invests the amount of Rs. 1 Lac in a 6 month bank FD (Fixed Deposit) that the interest rate gives 7 % p.a. Then, the annualized return,

He receives the maturity amount with the investment:   Rs. 1,03,440 /- (Invt: Rs. 1,00,000 plus interest - 3440 yearly compounded for the 6 months)

 

(If compounded half yearly,  then it will be Rs. 1,03,500 /-)

What exactly happened here...

The annualized interest rate gives 7 % p.a and the holding period is 6 months i.e. 1/2 years. So, the absolute return is 7 X 1/2 = 3.5 %

Actually, the return gives 3.44 %  but, the rate is calculated by adjusting the return for the fractional period.  In general, for an 'N' month deposit, interest earned equals to Investment amount X (rate) X (N/12).

Mostly, Annualized Returns can be viewed for the Bank Fixed Deposits, Mutual Funds to see the performance on Returns.

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How to Calculate Absolute Return on Investment

How to Calculate Absolute Return on Investment ?

Return on an Investment is a calculation to assess how the investment is performing. As every investment have a group of Inflows and Outflows. The Comparison of the inflows and outflows is the Return for the investor from making the investment.

Returns may be Positive (+) or Negative (-). A Positive denotes the profit on an investment and Negative gives the loss.

For eg:

• Akhil bought a Real estate property for Rs. 30 lakhs and sold it to Rs. 40 lakhs

• Suresh bought a 100 shares of XYZ Company with the amount of Rs. 20,000/- and sold all the stocks for Rs. 15,000/- 

The above example tells that Akhil had a profit of Rs. 10 lakhs i.e the return on investment is Rs. 10 lakhs. Suresh had a loss of Rs. 5,000/- from his stocks. So, it denotes the Negative Return on his investment. 

Measuring Investment Returns:

• Returns can be measured by comparing the amount of Inflows and Outflows for the investment made in Absolute Rupee Terms.
• Returns can be computing a rate of return by comparing the Inflows and Outflows.

On Absolute Rupee Terms, Akhil had a net return (Profit) of Rs. 10 lakhs, and Suresh had a Net return (Loss) of Rs. 5,000/-.  Here we are going to compute the rate of return by using the Absolute Term.

Absolute Return:

                                                             (Image Credit: licdn.com)

The Absolute Return on an investment can be computed:

(Return on Investment / Original Investment) X 100

Or 

in simple terms,  ((End value - Beginning value) / Beginning value)  X 100

So for the above example, Akhil had a profit of Rs. 10 lakhs,

Absolute Return =  ( 10,00,000 / 30,00,000 ) X 100  =  33.33 % 

Absolute Rate of Return for Akhil is:   33.33 %

Now, Suresh had a loss of Rs. 5,000/- and the absolute return is:  - 25 %

( 5,000 / 20,000) X 100  =    (25 %) i.e  net loss of     (-25 %)

If Suresh have sold his stocks for Rs. 28,000 /- with a Net return (Profit) of Rs. 8,000/- on his investment, then the Absolute Return is:

(8000 / 20,000) X 100 =  40 %

On this term, Akhil had a Rs. 10 lakhs profit on his hand with a Absolute Return: 33.33 % and Suresh had a profit of Rs. 8,000/- and the Absolute Return is: 40 %.  Comparing the two returns, it seems that Akhil had a higher amount of return in terms of Rupees, but he earns a lower rate of return(Absolute- 33.33 % ) than Suresh( Absolute - 40 %).

Absolute Rate of Return is a simple technique and formula for computing the exact returns on an investment, but it does not measure the investment on Holding period. Absolute returns can used to measure such as Sensex, Nifty about the performance of stock market for the period less than one year. For more than one year, we have to use Annualized, Holding period returns and CAGR(Compounded Annual Growth Rate).

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Rich Investing - An Investment Thought to create Wealth

7 Ways to Invest Life like a Zen

7 Ways to Invest Life like a Zen

Investing is always like a Mantra. It focuses for a Long term in a silent way. I am not talking about the Speculation or a Short term, but for the Long term with a sip of Water. We know how the Buddha and Billgates created the Tremendous Empire. As they had a different goals to consider, but they had a life as a Zen. The Master Shunryu Suzuki said,

Zen is not some kind of excitement, but concentration on our usual everyday routine. 

For a Long term Investor too, there are few ways to invest his life like a habit of Zen.

1. Invest Regularly and Stick to Fit:
   The most basic of Zen thought tells 'Work your day with little things and without any connection. You may walk alone for five minutes a day, Helping others what you have, Learn a language daily for 10 minutes or save Rs. 10/- daily for your kid - This is the way, how Buddha and Billgates grown on their Duty. So, Invest Regularly with any amount, but stick to it (Fit).


2. Love the Investing:
   Always taste the richness what you had. If you fail on some thing, Love and Learn it. Smell the taste of your food, but not just eating out. If you are a regular tooth brusher with a right hand, try now with your left hand also. Market Crash and Interest Rates decline are the normal aspect of Investing. Just love, it will keep you Rich.


3. Financial Goal for what would you need (Need and Desire):  Do it yourself (DIY) and Do what you like. Prepare a goal and work for it 30 minutes daily. If you are not satisfied with your current job or not liking the environment around you ? Just forget it, do what you really like or need. Focus yourself, to make changes.


4. Long Term Investment and Worry free of Volatile: Life is not a Permanent, even look for the long term investment. So, we can protect from the Volatile. Every day is not a same day and we have ups and downs. If restricted on anything, just Introspect yourself and remove the obstacles. Live in a Present and forget about what you had in the past. As, we saying that the life is not a permanent. Enjoy Yourself !


5. Concentrated and Delayed Gratification:
    Do one thing at a time and make it a habit. Don't rush for the Multi-tasking. If you have a work, do it with concentration of 20-30 minutes. Try it yourself and feel the concentration. If you are going to clean the room - Just clean it, but not with watching TV too. If you are looking to invest in stocks, then valuate the stock with financial statements. But don't confuse with the others like speculative. Delayed concentration is a big thing for Investor's appreciation in the long term. So, be concentrated and work slowly.


6. Achievable Financial Goals: Proud yourself. Nature gives us a marvelous structure and life with peace. No need to waste it. The Nature protects everyone, even we are killing the Air and water. So, take a financial goal and must achievable. Don't worry about the Market or others' Returns, See your portfolio returns with your Goals.


7. Invest in What you know:
    Be Lazy; Don't take all things in your head. Say, 'No' and Do what you know. If you are not aware of anything, Learn it and then implement. Again be lazy, but wake up early in the morning. Because, you are going to love yourself. Invest your money and life in what you know and learnt.

“You should study not only that you become a mother when your child is born, but also that you become a child.”

– Dogen Zenji

Signing off here with Rich Investing :)