What is the difference between absolute and relative returns?


Knowing the Fund Manager or broker is doing a good job can be a problem for some investors. It is difficult to determine which is good because it depends on how the rest of the market performs. For example, in a bull market, 2% is a terrible return. But in a bear market, when most investors fell by 20%, just preserving your capital is considered a triumph. In this case, 2% is not so bad.

Thus, the absolute yield is just or any portfolio of assets returned within a certain period. In the paragraph above 2% we have already mentioned, it would be absolute returns. If a mutual Fund returned last year 8%, then 8% would be its absolute return. Pretty simple stuff.

Relative return, on the other hand, the difference between the absolute returns and market efficiency (or other similar investments), which is defined by a benchmark or index such as the s&P 500. Relative income is the reason why the 2% profit is a bad thing in a bull market and a well in a bear market. (If You are not familiar with indexes, read more about them in our index investing tutorial).

Relative income is important because it is a way of measuring the effectiveness of actively managed funds that need to return more than the market. In the end, you can always buy an index Fund, which has a low coefficient of management expenses (Mer) and will guarantee the return of the market. If You are paying the Manager to perform better than the market and investments do not have positive relative returns over a long period of time, it may be worth your time to shop around for a new Fund Manager.

Absolute return does not mean that it is your own. You need to look at relative returns, to see how the return on investment in comparison with other similar investments. If you have a comparable benchmark to evaluate return on investment, and then you can decide whether your investment is good or bad, and act accordingly. (For further reading on the return, check out our article the truth behind mutual Fund returns.)

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