Annualized return shows how much profit or loss an investment makes each year, on average. It helps you compare the performance of different stocks or funds over different time periods. This makes it easier to choose the best investment options based on yearly growth.

What is Annualized Return?

Annualized return is the average return you get from an investment each year. Even if you invest for 2, 3, or 5 years, annualized return tells you how much the investment grew every year, on average. It helps you understand the yearly performance of your investment over time.

Why is Annualized Return Important?

Annualized return is important because it helps compare different investments easily. One stock might give 30% return in 3 years and another might give 40% in 5 years. By using annualized return, you can see which one gave better average returns per year. This helps in making better investment choices.

How is Annualized Return Calculated?

The formula for annualized return is:

Annualized Return = [(Final Value / Initial Value) ^ (1 / Number of Years)] - 1

It shows how much an investment grows every year, even if the returns are not the same each year. It gives a smooth, average growth rate.

How Does Annualized Return Help in Planning?

When you know the annualized return, you can plan better for your future goals like buying a house or retirement. You can estimate how much your investment will grow each year, which helps in knowing how much to invest and for how long.

Annualized Return vs Absolute Return

Absolute return shows total gain in the entire period of investment, while annualized return shows average gain per year. For long-term investments, annualized return gives a clearer picture of how steady the returns are over time.

How to Use Annualized Return for Better Decisions?

Use annualized return to compare stocks, mutual funds, or any other investments. Choose the one that gives higher and consistent annual returns. It helps you select options that grow your money faster and safer over time.