The famous scientist Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. In investing terms, it also called compound interest. But, unfortunately, many new investors lose money because they don’t understand how compounding works. The result, they chase after the unrealistic rate of return on their investments, whether they invested in the stock market, mutual funds, commodity market, real-estate or any other asset class.
It is because investors don’t care about the “Rupee” or “Dollar” per se, they only care about how many things they can purchase. So, whether it is about the “Mutual Fund” or some other asset class. They only care about a goof annual return on their investments. In here we will discuss an annual return for a mutual fund since mutual fund investors are long-term investors who seek consistent growth with less volatility.
If we take a look at the historical data, mutual funds tend to underperform compared to the market average during bull markets and outperform during bear markets. Since the risk tolerance of long-term investors is quite lower than the short-term investors and traders, they are more concerned with maximizing risk in their MF investments than they with maximizing gains.
As to what adds up a good average annual return for a mutual fund, “good” is actually defined by the individual investor’s expectations and desired level of return. Some investors satisfied with the return that is slightly above the average return of the overall market and consider a good annual return if it meets that goal. However, the investors who are seeking higher returns would be disappointed with that level of return.
So, in order to understand the mutual fund’s return over time, it is important to understand the difference between annual return and annualized return.
Annual Return
Annual return is the percentage change in an investment over a one-year period. Annual return helps investors to analyze the performance over any given year of a company or investment.
All it takes to determine the initial price of the investment at the starting period followed the price of the investment at the end of the one-year period. Their difference helps in determine investment’s change in price over time.
Annualized Return
In contrast, the annualized return can be used in a variety…
A puzzling article. I must have misunderstood "annualised"!
An example: a UK REIT, AEW Long Lease REIT announced that its NAV had risen by 4.56% over the past quarter. I make that 19.5% "annualised" [1.0456^4) which doesn't seem to fit the author's definition here.
Incidentally, the AEWL example (from yesterday) made me suspicious - do ordinary commercial property companies see that kind of rise in today's markets? (Gearing level isn't big enough in this case.)
