If you are investing in the financial market, there are countless investment options such as mutual funds, stocks, fixed deposits, and many other financial products. Measuring the investment returns of these financial instruments is essential to help you evaluate the different options. Depending on this evaluation, you can either invest, skip, or stop a particular investment opportunity. You can measure investment returns in several ways, but first let us understand why we should measure investment returns.

Quantification of investment is necessary for analyzing investment opportunities. By comparing similar investment instruments according to their investment returns, you can choose the one that is providing good consistent returns. Comparing two funds based on their returns will not give you a true picture. The rate of return on the investments makes it easier to compare them, and without the rate you would not be able to quantify which was more beneficial to your investment. To calculate the percentage, divide the actual return by the invested amount, and multiply the result by 100. To get a true picture of all investment options, use the same time frame.

How to measure the investment returns?

1. Absolute Returns –

A return on investment is calculated by calculating the amount you have gained. This method does not take into account the timeframe or risk involved. Investing 2 lakhs in a fixed deposit and having it increase to 3 lakhs in five years is an absolute return of 50% over the principal invested.

1. Price Returns –

The Price Return only measures the difference between the initial value and the final value of the invested amount. This does not reflect the dividends, interest, or any other benefit you earned, as well as any expenses you incurred, including fund house charges and account-maintenance fees.

1. Total Returns –

Investment returns include dividends, interest earned, and any other benefits derived from investments. This method is applicable to mutual funds with growth options which reinvest dividends.

1. Annualised Returns –

In comparison to Absolute Returns, which only consider the return without considering the duration of investment, Annualized Returns, on the other hand, provide the true picture by breaking down the absolute return into annual returns. Here’s an example –

Assuming that you have invested 2, 50,000 in an equity oriented mutual fund, the fund’s value after 3 years is 3, 00,000. The absolute return is 20%, but the annualized return is 6.3% (Current value of investment/Actual cost of investment)* (1/number of years held)-1).

Diversification is important, but so is keeping track of the returns on each investment. You will be able to make adjustments to your portfolio when a particular fund isn’t performing as you would like.