Annualized Return is the average yearly return of an investment over a specific period, expressed as a percentage, assuming the returns are compounded annually.
Annualized Return helps investors understand how much an investment grows per year on average, even when the actual investment period is shorter or longer than one year. It standardizes returns, making it easier to compare different investments like mutual funds, stocks, fixed deposits, or bonds.
This metric assumes that profits are reinvested each year, which makes it more realistic for long-term investing. Annualized return is often referred to as CAGR (Compound Annual Growth Rate) in mutual funds and equity investments.
Unlike absolute return, which only shows total gain or loss, annualized return accounts for the time factor, making it a more accurate measure of performance. Investors rely on annualized returns to evaluate fund performance, plan long-term goals, and assess whether an investment beats inflation.
"If an investor invests ₹1,00,000 and it grows to ₹1,33,100 in 3 years, the annualized return is approximately 10% per year, even though the total gain is ₹33,100."