Absolute vs CAGR return, explained simply

Q: Absolute return measures:

The plain percentage gain, ignoring time. Absolute return is the raw percentage, with no adjustment for how long it took.

Q: For a 5 year period, the fairer way to quote return is:

CAGR (annualised). CAGR spreads the gain per year, so it can be compared across funds and periods.

Q: ₹1 lakh becomes ₹2 lakh in 5 years. The absolute return is:

100%. The money doubled, so the absolute return is 100%. The CAGR is about 15% a year.

Q: Rolling returns are preferred over point-to-point because they:

Do not depend on one lucky start and end date. Rolling returns average many periods, so one lucky window cannot flatter the fund.

How returns are measured

Absolute, annualised, and CAGR

A fund can advertise a big number and still be ordinary, because the way a return is quoted changes how good it looks. Learn the three ways and you cannot be misled.

This lesson teaches a concept for the NISM Series V-A exam. It is education, not financial advice.

1
Absolute return is the plain percentage gain, ignoring how long it took.
2
Annualised return, or CAGR, spreads the gain evenly per year, so periods can be compared.
3
For anything over a year, use CAGR. Absolute return over 5 years flatters a fund.
4
Point-to-point returns depend on the start and end dates; rolling returns are steadier and fairer.

Rupee example

₹1 lakh grows to ₹2 lakh in 5 years. Absolute return is 100%, but the CAGR is about 15% a year.

Practice

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Real exam format. Answer by voice, tap, or press 1 to 4. No negative marking, so always attempt.

Answer by voice

Tap the mic and say A, B, C or D. Typing is optional.

Absolute return measures:

Absolute return is the raw percentage, with no adjustment for how long it took.

Per-year is annualised; risk and benchmark are separate.

For a 5 year period, the fairer way to quote return is:

CAGR spreads the gain per year, so it can be compared across funds and periods.

Absolute return over years overstates the yearly experience.

₹1 lakh becomes ₹2 lakh in 5 years. The absolute return is:

The money doubled, so the absolute return is 100%. The CAGR is about 15% a year.

100% total is not the same as 100% a year.

Rolling returns are preferred over point-to-point because they:

Rolling returns average many periods, so one lucky window cannot flatter the fund.

They are about fairness, not being higher or ignoring risk.

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NISM V-A syllabus

1What a mutual fund really is

2How a fund is built

3Who watches over it

4The offer document, decoded

5Getting funds to investors

6Selling the right way

8NAV, loads and the daily price

9Types of schemes, and picking one

10Return, risk and performance

11How gains are taxed

12Serving the investor

See the full roadmap →