What is Annualized Total Return and How to Improve it?

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As a definition, annualized total return is the geometric average amount of money that is earned as a part of investment every year during a given period. This calculation is generally used to gain an idea about the particular investment. The calculation helps the investor to gain an insight into how much the investor will accumulate in the given period. In a simple example, if you invest a rupee, you expect to get back the rupee.  Sometimes when you invest in a profitable business, you will get a nice return within short span of time. In the investment business, there is only talk about investments that ends with returns on an annual basis. The calculation is wholly based on the annualized return that you will get for a return that you used to get in, say, six months. This can be done only with the help of the annualized total return calculation.

If we are comparing the annualized total returns of two funds, an expert can come to a logical understanding the nature of them both.  It simply means that since investment returns are compounded, they depend upon each other. The calculation will underline the volatile nature of any of the funds and take the correct measures to deal with them. To reach a satiable conclusion regarding the calculation, there is a formula that is used rampantly by the financial experts.

                Annualized Return= ((1 + r1) x (1 + r2) x (1 + r3) x… x (1 + r (n))) 1/n – 1

(r= appropriate return. n= number of years.)

There might be some changes in the formula at the moment, with the times and events have changes so much over the time. The calculations can be done only when the numbers are independent. The main use of this sort of calculation is solely because the amount of investment lost or gained during the year has to be charted and the calculation will put an idea on this. The annualized return will help to give clarity to the mutual funds and stocks that were traded off.

In observation, we can understand that any investments that were not able to be chased for 365 days cannot be annualized. The common calculation that is the arithmetic mean or simple average would not do good while calculate the annualized rates. The main difference aspect between the two could be their volatile actions. The annualized return or the compounded result will reflect the real economic reality of the investment.


Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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