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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