What is Absolute Returns and what is Annualised Returns ? Which one should the investor trust while investing in mutual funds ?.

Absolute returns: Let us take an example of SBI Magnum tax gain which has given returns of 10.5% in last 1 year (as on 30/5/2008) . This is absolute returns for 1 year. Now the same fund has given an absolute returns of 1089.3%. for a 5 year period (as on 30/5/2008) meaning if you had invested Rs. One lakhs in this fund 5 years earlier it would have now been Rs. Ten lakhs and eighty-nine thousand.

Annualized returns: Using the same example Annualized returns are calculated based on adding first year returns to the principal amount for calculation of next years returns and so on and so forth. so annualized returns for the SBI Mangum taxgain scheme for 1 year was 10.5% (as on 30/5/2008) whereas for last five years annualized returns is 64.1% (as on 30/5/2008)
It still means that your Rs. 1 lakh invested in the same fund 5 years is now Rs. Ten lakhs and eighty-nine thousand.

NOTE : Mutual funds returns should be compared in Annualized returns in order to be compared with other products such as Bank FD's , ULIP's, Post Office MIS etc.

Example :
1) If you invest Rs. 100 ; after 1 year returns is 20% so end of the year it becomes Rs. 100 + 20= Rs. 120.
2) Now second year also you make a profit of 20% so your money is Rs. 120 + 24 = Rs. 144
3) After 2 years your money of Rs. 100 is now Rs. 144 so your
Absolute returns for 2 years is 44% whereas Annualized returns is 20% year on year.