What is Absolute Return in Mutual Fund

When you put your money in a mutual fund, you hope it grows. To know how much it has grown, absolute return comes in. The absolute return shows you the real deal — the actual gain or loss, no tricks.

By understanding absolute return, you can make smarter choices, aiming for a nice increase in your investment without too much risk.

Plus, you will get why some funds are all about beating the market and others just want to give you a steady income. 

So, let’s dive into what is absolute return in mutual fund and gain a deeper understanding of how your money works in a mutual fund.

What is Absolute Return in Mutual Funds?

You need to make an informed decision while investing in mutual funds as the ultimate goal of investing is to get returns. To measure this, absolute return is helpful.

Absolute return is about how much money your investment makes, no matter what’s happening in the market.

Imagine you put your money in a mutual fund and, after a year, it grows by 8%. That 8% is your absolute return. It has no interference with any other factors. 

Think of it like this: You give your money to experts, and they use it to buy things that should increase in value. Sometimes, these things do well, and other times, not so much.

Absolute return measures the direct growth or decline in your investment without considering market movements. It answers the question: “How much did my investment grow in numbers?”

Now, why should you care? Knowing about absolute return can help you pick the right mutual fund. Some funds might go up and down a lot, while others are steadier.

Difference Between Absolute Returns and Relative Returns

In the world of investments, two terms often pop up: absolute return and relative return. Let’s break them down simply.

Absolute return is the percentage at which your mutual funds grow. On the other hand, relative return is about comparing your investment’s performance against a benchmark, like an index, to see if it outperforms or underperforms the market.

A relative return compares your investment’s growth to something else, usually a market index. Let’s say the mutual fund aimed to beat the Nifty 50 index.

If the Nifty 50 grew by 5% and your mutual fund grew by 8%, your relative return is the extra 3% over the Nifty 50.

Here is a simple table to compare absolute and relative returns.

Remember, the companies and numbers here are hypothetical. We are using these numbers to illustrate the difference between absolute and relative returns.

In this table:

• Reliance Industries had an absolute return of +10%, but since the Sensex grew by +12%, it underperformed the market, leading to a relative return of -2%
• TCS showed a stronger performance with an absolute return of +15%. It outperformed the Sensex, which only grew by +12%, giving it a relative return of +3%
• HDFC Mutual Fund had a modest growth of +8%, which was still better than the Sensex’s +7%, making its relative return +1%
• ICICI Bank, on the other hand, grew by +5%, which was less than the Sensex’s growth, resulting in a -7% relative return

How to Achieve Positive Absolute Returns in Indian Markets?

Achieving positive absolute returns means making your money grow, no matter how the market moves. Here are some strategies for achieving positive absolute returns in Indian markets:

• Diversify Your Portfolio: Don’t put all your resources into one investment. Mix it up with different types of mutual funds. This way, if one investment dips, others might still do well.
• Invest in Blue-Chip Funds: These are big, stable companies with a solid track record. They are less likely to give you unpleasant surprises.
• Look for Value Funds: These are stocks that trade for less than they are really worth. With some research, you can find these hidden gems before they take off.
• Use SIPs in Mutual Funds: Systematic Investment Plans (SIPs) let you invest a fixed amount regularly. It’s a way to build your investment steadily without worrying about timing the market.
• Stay Informed: Stay updated on market news and trends. Knowledge is power. Staying up-to-date helps you make optimised and data-driven decisions.
• Consider Fixed Deposits and Bonds: For a steadier ride, look at fixed deposits with banks or bonds. They offer fixed returns over time, making them a safer bet.

Conclusion

Understanding absolute and relative returns is important for investors in India.

These strategies can help you fight the ups and downs of the Indian markets and aim for positive absolute returns. Remember, investing wisely and patiently is key to seeing your money grow.

📌 You can also read:

• What is OTM in Mutual Fund?
• What is CAGR in Mutual Funds?
• How to Invest in Mutual Funds for First Time?

Happy Investing 💰