How to Calculate Absolute Return on Investment

How to Calculate Absolute Return on Investment ?

Return on an Investment is a calculation to assess how the investment is performing. As every investment have a group of Inflows and Outflows. The Comparison of the inflows and outflows is the Return for the investor from making the investment.

Returns may be Positive (+) or Negative (-). A Positive denotes the profit on an investment and Negative gives the loss.

For eg:

 

• Akhil bought a Real estate property for Rs. 30 lakhs and sold it to Rs. 40 lakhs

• Suresh bought a 100 shares of XYZ Company with the amount of Rs. 20,000/- and sold all the stocks for Rs. 15,000/-

The above example tells that Akhil had a profit of Rs. 10 lakhs i.e the return on investment is Rs. 10 lakhs. Suresh had a loss of Rs. 5,000/- from his stocks. So, it denotes the Negative Return on his investment.

Measuring Investment Returns:

• Returns can be measured by comparing the amount of Inflows and Outflows for the investment made in Absolute Rupee Terms.


• Returns can be computing a rate of return by comparing the Inflows and Outflows.

On Absolute Rupee Terms, Akhil had a net return (Profit) of Rs. 10 lakhs, and Suresh had a Net return (Loss) of Rs. 5,000/-.  Here we are going to compute the rate of return by using the Absolute Term.

Absolute Return:

                                                             (Image Credit: licdn.com)

 

The Absolute Return on an investment can be computed:

(Return on Investment / Original Investment) X 100

Or

in simple terms,  ((End value - Beginning value) / Beginning value)  X 100

So for the above example, Akhil had a profit of Rs. 10 lakhs,

Absolute Return =  ( 10,00,000 / 30,00,000 ) X 100  =  33.33 % 

Absolute Rate of Return for Akhil is:   33.33 %

Now, Suresh had a loss of Rs. 5,000/- and the absolute return is:  - 25 %

( 5,000 / 20,000) X 100  =    (25 %) i.e  net loss of     (-25 %)

If Suresh have sold his stocks for Rs. 28,000 /- with a Net return (Profit) of Rs. 8,000/- on his investment, then the Absolute Return is:(8000 / 20,000) X 100 =  40 %

On this term, Akhil had a Rs. 10 lakhs profit on his hand with a Absolute Return: 33.33 % and Suresh had a profit of Rs. 8,000/- and the Absolute Return is: 40 %.  Comparing the two returns, it seems that Akhil had a higher amount of return in terms of Rupees, but he earns a lower rate of return(Absolute- 33.33 % ) than Suresh( Absolute - 40 %).

Absolute Rate of Return is a simple technique and formula for computing the exact returns on an investment, but it does not measure the investment on Holding period. Absolute returns can used to measure such as Sensex, Nifty about the performance of stock market for the period less than one year. For more than one year, we have to use Annualized, Holding period returns and CAGR(Compounded Annual Growth Rate).

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