An Annualized return is the amount of money that has earned for the investor per annum. An annualized return gives a clearer picture when comparing various mutual funds that have traded over different periods of time. However, this is applicable only if investors re-invest their gains every year.
In other words, An Annualized return is period returns re-scaled to a period of 12 months. This process allows investors to compare returns of distinct assets that they have owned for different duration of time.
Formula to Calculate Annualized Return:
Annualized Return Form: (Period Ending Price/Period Beginning Price) ^(1/t) – 1
First of all, we need to calculate Investments return by using the following formula:
For example, If an investor invested ₹10,000 in ABC Ltd. for 10 years ago, and that shares bought by the investor (including reinvested dividends) are currently worth ₹ 23,800. And the following formula helps to calculate the total Investment Return.
Thus, the total return for over a decade has been 138%. Since we’re considering a 10 year period, I’ll use 0.1 as my power to calculate the annualized return:
Thereafter, it helps to calculate Annualized return by using the following formula:
Annualized return = (1 + Total Return)1÷ Time(years)-1
Note: This formula assumes all dividends paid during the holding period were reinvested.
And the next step is dividing the number one by the number of years of returns considering by the investor. For example, if the investor looking at a 10 year holding period, dividing one by 10 gives 0.1. To annualized his/her returns, raise the overall investment return to this power, and then subtract one.
Annualized return = (1 + 1.38)0.1 – 1 = 0.0906
Translated to a percentage, this shows that your 10 year investment in ABC Ltd, produced an annualized return of 9.06%.