Annualised Return

Annual return measures how much an investment increases on average each year. Calculated as a geometric average, it's useful for assessing performance over time and comparing investments. A 10% annual return is often seen as a strong long-term ROI in stocks.
Annualised Returns
3 min
21-June-2024

Measuring the annualised returns on a particular investment during a period of one year helps investors in making educated and strategic investment decisions. Hence, in other words, annualised return meaning is the geometric average of the earnings of an investment over one year. The annual rate of return formula ascertains the rate of return on the invested principle without accounting for any committed or available cash.

The annual rate of return on mutual funds, similarly shows the investor what he would have earned had the annual return were compounded over a certain time period. However, it needs to be noted that this calculation does not show the investor any negative changes or potential fluctuations in price or the investment’s volatility.

Since analysing a particular investment's rate of return in a single year is not the best gauge of its value always, several investors may calculate an investment's annualised returns over several years. This is possible by calculating the return rate each year or through the grouping of longer time periods when calculating the investment’s annualized return. By making use of the information derived from the annual rate of return formula, the investor can determine the effectiveness of his investment by making a comparison of his returns on similar investments.

What is an annual return?

Annualised returns are also called the geometric average, and is the annual return rate on an investment that analyses its net loss or gain within a specified time period after taking the concept of compounding into consideration. The calculation can benefit an investor since it shows the annual return rate’s interdependency on the return rates of previous years. Moreover, it also provides a clearer picture of the performances of several stocks which were bought and sold over multiple time periods in the past and aids in taking prudent investment-related decisions.

Formula of Annual Rate of Return

Annualised Return = (1 + Return) ^ (1 / N) - 1, where N is the total number of periods taken into consideration for measurement.

How to calculate Annualised Returns?

For accurate calculation of an annualised return, initially, one has to work out the investment’s overall return. The basic formula for calculating overall return is the end value – initial or beginning value divided by the beginning value, which is the portfolio’s worth when the investment was made. The end value is the portfolio’s worth at the period’s end on which the calculation is done.

Once the overall return is worked out, the annualised return can be subsequently calculated. In the annualised returns formula, the figure "1" divided by "N" represents the unit being measured, say, one year. Similarly, figure 365 may be used instead of 1 for calculating the investment’s daily return.

The "N" contained in the formula is the total number of periods being measured. For instance, if an investment’s annualised returns are calculated over a five-year period, figure 5 can be used as N.

Hence, the annualised return calculation would be:

(1 + 2.5) ^ 1/5 - 1 = 0.28

Thus, the investment’s annualised returns would amount to 28% over five years.

Calculation of Mutual Funds Annual Return

The annualised returns on mutual funds are calculated on the basis of the Compound Annual Growth Rate (CAGR). The process involves considering the investment’s initial or beginning value, its end or final value, and the investment’s time period in years.

The formula for calculating the CAGR is CAGR=(PVFV)n1

​Once the CAGR is calculated, it has to be multiplied by 100 to be represented as a percentage.

If you are an investor and want to start your investment journey, you may visit the Bajaj Finserv Mutual Fund platform to learn more about mutual funds and SIPs. Feel free to make use of their Lumpsum calculator and SIP calculator to calculate your financial goals better.

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Frequently asked questions

How do you calculate Annualised return on mutual funds?
The annualised returns on mutual funds is calculated on the basis of average annual returns over a predetermined period, which is more than one year typically for deriving a standardised performance measure. The fund’s historical Net Asset Value is collected for its initial and end dates, followed by the calculation of total return, which is end NAV minus initial NAV plus distributions or capital gains or dividends received during the said investment period. The annualised return is finally calculated using the formula Annualized Return=(1+Total Return)Number of Years1-1

What is a good annual rate of return for a mutual fund?
A good annual rate of return for any mutual fund varies on certain factors like the fund's risk level, investment strategy, and overall market situation. Historically, however, annual yields from mutual funds have been between 5% and 10% on average, even though this could have been lower or higher depending on a specific fund and its examined time period.

What is 3 year annualized return?
A 3-year annualised return is a measure of the yearly average return on an investment that it has generated during the last three years and is denoted in percentage terms.

What does 10 year annualized return mean?
A 10-year annualised return denotes the average annual return rate of an investment during a 10-year period, and provides investors with an indication of their investment performed on an annualised basis during the long term.

What is a 5 year Annualised return?
A 5-year annualised return is a measure of the yearly average return on an investment that it has generated during the last three years and is denoted in percentage terms.

What is the formula for annualised return?
The formula for calculating the annualised return is as follows: Annualized Return=(Ending Value−Beginning Value)× number of Years ×100%

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.