Mr. Mehta : XYZ is a fantastic fund. It has given me 21% returns p.a.
Mr. Khanna : What are you saying ? I have the same fund, but it has given me only 5% returns. Bank Recurring Deposit (RD) would have been better.
Mehta : How long have you been invested in it ?
Khanna : I invested in it 5 months back.
Mehta : So 5% in 5 months is almost 12% annualised Dude.
Khanna : What is the meaning of annualised return ?
Mehta : For example, you have 2 products A and B. A gives you 8% return in 6 months and B gives 10% returns in 12 months. Which is better ?
Khanna : Obviously A.
Mehta : Why so ?
Khanna : Because if A has given 8% return in 6 months , after 12 months the return would be around 16%.
Mehta : Great. So basically what you have done is standardized the return period to 12 months for both the products, so that you can compare. This is what we call annualised return.
Khanna : Wow. Thanks. Now I understand it better. 12% looks good. But it is still less than 21% as you say. Whats that about.
Mehta : Have you done a lumpsum investment or doing a monthly SIP ?
Khanna : I am investing some amount every month since last 5 months ?
Mehta : So that makes your average holding period only 2.5 Months.
Khanna (Confused) : Whats this “Average Holding Period” now ?
Mehta : When you started your SIP 5 months back, your first instalment got 5 months time to grow, your second instalment got 4 months and so on. Your last instalment is not even a month old now.
Khanna : Correct.
Mehta : So if you take an average, your total investment has an approximate holding period of 2.5 Months. Now, when you annualise it, it becomes almost 24% p.a.
Khanna : Wow, Finally I have beaten you.
Mehta (Smiling ) : See this is the problem. Before some time, the fund was bad as your returns were “appearing” to be lower than mine. Now, that your returns are proved to be higher than mine, then the fund is not great. Its you who have beaten me.
Khanna : I was just kidding.
Mehta : I know. My Point was, we say that we want to know the truth. But we don’t really take some efforts to understand the truth. We take things the way they are presented to us. This is where your truth becomes different than my truth.
Khanna : But truth is still a truth right.
Mehta : This is like a half glass water story. You say its half full, I say its half empty. Whats the truth ? Both are truth. Its how we look at it. In this example, we had same fund but still the different perception about returns gave us different opinion about it. There could be cases, wherein 2 people invest in same fund but with different mindset and profile, may get different returns. It is very person specific.
Khanna : One last question. How do you really calculate all this average holding period, annualised returns etc when your portfolio grows large ? Its difficult, time consuming and cant be sure of being correct.
Mehta : My Financial Advisor does it for me. And now I have even stopped bothering too much about the annualised returns also. I know in short term it can fluctuate. But in the long term, if it helps me achieve my goals, how does the short term fluctuations matter ?
We look forward to your valuable comments and feedback.
The Author Prof. Saurabh Bajaj (BE, MBA, FRM, CFGP) is CEO with Nidhi Investments, Mumbai. He may be contacted on CEO@nidhiinvestments.com if you have any questions.
(The views mentioned in the article are personal opinion of the author)
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Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner.
He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management).
After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years.
Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO.
Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert.
He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com .
He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013.
He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc.
He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc.
He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation.
Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills.
Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills.
He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years.
He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc.
He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff.
Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla.
He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai.
He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.
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Probably the best post in all that I’ve read. Great way to help all understand the real importance to invest for long term. Thanks Saurabh.
Thanks for the valuable feedback Bro.
We look forward to more visits and feedback in future.
Wow Saurabh Bhai As usual Solved the complicated queryies in very simple yet powerful way.
Your method of make people understand the point through example is really very good. Even
people without any Financial Knowledge can also understand by your example.
Thank you so much for your kind words.
Looking forward to more visits and feedback in future.
Given example is major common issue of discussion among investors. As always financial products are always highlighted with returns. Thanks to author who has elaborated it in simplified way and made understanding more clear.
Given example is major common issue of discussion among investors. As always financial products are always highlighted with returns. Thanks to author who has elaborated it in simplified way and made understanding more clear.
Thanks for your kind words dear.
Looking forward to more visits and feedback in future.
Suddenly enlightened about annualised return concept 🙈… Well written!!
Thanks for your kind words dear.
Looking forward to more visits and feedback in future.
Amazing article…Very nicely explained.
Bingo, the queries on annualized returns solved.
Thanks for your kind words dear.
Looking forward to more visits and feedback in future.
Easiest way to explain👌🏻👌🏻
Thanks for your kind words bhai.
Looking forward to more visits and feedback in future.
Nice article
Thanks for your kind words bhai.
Looking forward to more visits and feedback in future.
Good examples to understand in better manner for laymen also.
Thanks for your kind words Laxman.
Looking forward to more visits and feedback in future.
Simple and effective.
Thanks uncle for your valuable feedback.
Looking forward to more visits and feedback in future.
This reminds me of an innocent boy and a girl who got married a few months back and had usual husband-wife problems in initial months of their marriage, and they were thinking that it not working out as they heard about. Both wanted everything to settle down as quick as possible like a magic until an elder man met them and talked about their issues. The elder man shared his lifetime experience and advised them accordingly, asked to wait and give time to each other, and overall his advice gave them a sign of relief. And things went well from there.
Similarly, investment and investor are alike a marriage and both needs their time to settle down. Initial months are of high expectations and things go wrong in that many times and people get the divorce (because that is so easy these days, isn’t it? 😛 ). Instead of getting the divorce, talk to people who are in this field for a long time and of course, this will give a sign of relief. Wise people who give the time, have patience, they can plan their kids happily 😀 and enjoys their investment.
So, investment is not a magic, isn’t it? This is a discipline that one needs to follow without looking at the numbers.
Nice article brother!!
Very well written and in simple language….Thanks Saurabh for sharing this
Thanks for your valuable feedback Rahul.
Looking forward to more visits and feedback in future.
Everyone has to follow his suggestions to improve in savings and investments to take care of financial short comings in future life. Thanks
I’ve read this late. And I’ve given the responsibility to you to invest so I haven’t bothered (excuse me for that). But, loved the explanation, simple and straightforward. Thumbs up for this article
Thanks for the lovely compliments Ma’am.
Looking forward to more visits and feedback in future.
Excellent blog right here! Also your web site so much up fast! What web host are you the usage of? Can I get your associate link in your host? I want my web site loaded up as fast as yours lol
Excellent weblog right here! Also your site so much up fast! What host are you the use of? Can I am getting your associate hyperlink for your host? I wish my site loaded up as fast as yours lol