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Absolute return is the return that an asset gains over a certain period of time. Absolute return measure the gain or loss that an asset achieves over a given period of time. The asset could be Mutual Funds, stocks, etc. Absolute return is expressed in percentage.
Absolute return can also refer to the Total Return of a Portfolio or fund, as opposed to its relative return against a benchmark. It is called relative because many mutual fund scheme's performance is benchmarked against an index.
The formula for absolute return is-
Absolute returns = 100* (Selling Price – Cost Price)/ (Cost Price)
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For an illustration purpose, let's take an example. Let's suppose that you have invested in a asset on January 2015 at a price of INR 12,000. You sold the investment in January 2018 at the cost of INR 4,200.
Absolute returns in this case will be:
Absolute returns= 100* (4200 – 12000)/12000 = 65 percent
Investors who are willing to take risk for short and long term gains, absolute return analysis can be used for choosing the mutual fund. Investors can make good returns, if invested in right funds for long-term horizon.