Relative & Absolute Returns – Brief with Gulaq
These returns refer to a benchmark index/market index of the country. Basically, it is the difference between the absolute and the market index return. The aim is to produce return that can beat the benchmark.
Relative Return %: Absolute return % – Benchmark Index return%
Relative Returns – Importance
- Helps in identifying the funds that are providing better returns than index
- Ease-in investor decision-making
- Can measure the overall performance of a fund in a bull and bearish market
- Long-term time horizon
- Heavy reliance on market-trend
- The goal is to provide better returns than the benchmark index
The Analysis of the Relative Return – When to Use?
These returns help in understanding the funds that are outperforming the market; also, when an investor wants to know the perfect/correct time to opt for a new mutual fund, this analysis will help him/her figure out the fund.
These returns are known where the mutual fund has given for certain time-period. Whatever gains/losses/returns that the mutual fund provides is the absolute return(s) without comparing to any other benchmark index. In here, the fund managers are known as ‘hedge fund managers’ who aim to maximize the return using different strategies in the market available for the investors.
Absolute returns%: (Current value-Investment value)/ Investment Value
Absolute Returns – Importance
- Dynamic risk-management
- Goal is to provide positive returns
- Enabling less impact by market-volatility
- Short-term horizon for better returns
- Dynamic risk-management
- Ease to calculate
Absolute Return Analysis – When to Use?
Investor who is ready to take risk for both short & long-term gains, absolute returns analysis can be used.
- Sr no 1-5 mutual funds and the return per cent mentioned are basically the absolute returns of the mutual funds (annualized return %) over the time period mentioned – 3Months ,1 yr, 3 Yr & 5 yr
2.Relative Returns: Relative return of the mutual funds will be calculated as below:
Relative return for Axis long term Equity Fund and Nifty index
Relative return 3 months: (0.5%-0.4%) = 0.1%
1 year: (21.6%-16.3%) = 5.3%
3 years: (9.1%-5.8%) = 3.3%
5 years: (22.8%-12.2%) = 10.6%
Here we see that the Axis long term Equity has outperformed the Nifty over all the period of time and hence can be considered a good investment fund.
Similarly, for SBI magnum Tax gain scheme which has underperformed for 3 months and has been at par for 1-year returns % can be considered a long–term bet with 5.2% (17.1%-12.2%) relative return over 5 years on Nifty and 4.3% (17.11-12.8%) on BSE 100 Index.
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*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing