What is Absolute Return Investing in Mutual Funds?

Absolute returns in the context of mutual funds relate to a fund’s performance over a specific time frame. In this essay, we examine absolute returns in great detail. The calculation technique to be employed for determining returns on investment will depend on the investment time horizon. You can compute using the absolute return approach if the time horizon is shorter than a year. You can compute using the annualized returns approach if the time horizon is more than a year. The absolute return meaning, methodology, and calculation process will be the main topics of this article. 

What is Absolute Return in Mutual Fund?

Mutual funds with an absolute return seek to maximize investor returns regardless of stock market fluctuations. Best absolute return mutual funds, in contrast to normal mutual funds, focus on generating solid returns over a certain time, regardless of whether the broader market is rising or falling. 

The capacity to employ several investing strategies and asset classes is one of the key characteristics that distinguish absolute return mutual funds from other investment vehicles. Stocks, bonds, and financial contracts are all options for investment. Delivering sustained positive returns is the main goal, even in choppy or deteriorating markets. Absolute return mutual funds are intended to offer stability and possible returns to investors that are not associated with larger market swings.

Before adding absolute return mutual funds to their investing portfolio, it is crucial for investors to thoroughly evaluate their performance history, investment philosophy, and risk management procedures. Therefore, the  absolute return meaning is clear here. Let’s now understand how it works.

How does Absolute Return Work?

The price at which the investment was purchased and sold are both taken into account when calculating the absolute return. The purchase price is then multiplied by the difference. The absolute return % is the figure multiplied by 100. When the investing time horizon is smaller than a year, absolute return is helpful. For instance, you must have seen the returns on mutual funds for the previous week, month, quarter, six months, year thus far, etc. All of these results are absolute.

What Is The Absolute Return Formula?

The following equation can be used to determine absolute returns:

((Selling price – Purchase price) / Purchase price) * 100 equals the absolute return

For instance, at a Net Asset Value (NAV) of 10, Ajay purchased 100 units of the ABC Mutual Fund Scheme. He sold the units for 15 NAV. This is how the absolute return will be determined:

Sales price minus Purchase price equals 15 minus 10.

= Rs 5 in revenue per unit

Profit / Purchase Price multiplied by 100 is (5 / 10).

= 50%

In this instance, Ajay received a 50% absolute return.

Calculating the absolute return makes sense if Ajay’s investment term is under a year. Ajay should compute the annualised returns rather than the absolute return if his investment term is more than a year. I hope with this example the absolute return formula is clear. 

Absolute Return Strategies

The fact that absolute returns are independent of any benchmark or standard is a crucial strategy for them. The majority of market-active funds have always measured their success against another benchmark. Therefore, if a fund outperforms the benchmark, it is regarded as good even if the return it generates is negative. Conversely, if the same fund underperforms the benchmark, it is regarded as bad even if the fund itself is meeting its goal and generating a positive return. As a result, it disregards all benchmarks and established standards. It just takes into account how well it performs and how much money it makes.

They are typically seen as the one who concerns about the portfolio, which is another technique that may be connected to how to calculate absolute return. Absolute return fund managers worry about what could go wrong rather than what could go well, and they manage risk accordingly. Other fund managers are focused about what could go right. This gives investors the option of portfolio diversification, where fund managers invest indiscriminately in a variety of avenues by looking for choices that have the best returns and the lowest volatility.

Finally, customers are always searching for returns that are least correlated with traditional equities and bonds. The correlation coefficient measures the amount and degree of dependence between two sources of income. Thus, lack of correlation might occasionally be advantageous because not all components of an absolute return portfolio will be affected when the market moves in a negative direction.

Advantages Of Absolute Return Strategy

Below are a few advantages of the absolute return strategy.

The exposure of the portfolio is minimised: By employing this method of return computation, the volatility element to which any portfolio may be subject is diminished.

Extending the sources of investment return: When using the absolute return calculation, we may consider a number of sources or platforms when generating a return.

Portfolio diversification: Since we are not bound by any traditional benchmark, we are able to spread our holdings across many platforms.

The portfolio’s risk-adjusted return is improved: When one employs this approach, the enhancement of the risk-adjusted return is a crucial element that comes into play for every investor.

A stop-loss limit is being set: The biggest benefit is that we can control our losses and determine if our investments are going in the incorrect directions and yielding no return at all.

Disadvantages Of Absolute Return Strategy

These are a few of the absolute return approach’s drawbacks.

• When comparing various time periods, it is not an appropriate metric.
• It becomes challenging to compare different assets while doing so.
• Even when the absolute return is positive, the ultimate return may have a negative value since the return does not account for the assets’ inflation.
• It considers all types of investments, including those with high and low risk. Any investment has risk, which is a crucial component; if it is disregarded, the return does not reflect an accurate value.
• It is challenging to assess the outcome since there is no baseline comparison of the return.
• Investors are left in the dark regarding the fund manager’s performance.

Conclusion

Absolute return mutual funds have grown in popularity in India as investment vehicles that aim to provide profitable returns regardless of market fluctuations. These funds provide potential benefits for risk management and diversification to investors seeking stable returns in a range of market scenarios thanks to their active management, flexible investing style, and concentration on absolute performance. Share India can help you on your investment endeavours. Share India provides a variety of options that can be tailored to your needs, so you don’t have to figure things out on your own.