Understanding annualized Percentages

Always confused on how come your financial planner/Mutual fund shows higher returns than what you see in your bank book - then this post is for you.

Lets understand some basics first.

1. Annualized means what is your returns going to be if your worth continues to grow the same way as it has done for the period of time you have held it.

2. Annualized is a right metric to look at for some types of products only.

So if the return is a confirmed return- like Fixed Deposits, Company Deposits, RBI bonds etc- then calculating the annualized return makes sense.However for non fixed kind of returns - forecasting annualized returns makes no sense.

So if you have a Fixed deposit which earns you around 1% per month-- and you have invested 2 months ago- your present return is 2% and forecasted annual return is 12%.

But if you have bought a stock at 100/- two months ago and the price is now 110/-., you now have a 10% return. If we looked at the annualized return - it would have been 50%.However since stock price is not a fixed return of the product- you cannot be sure that at the end of the year, the price will remain the same, go up and to what level or go down and to what level.
Hence looking at an annualized return does not make sense for a Stock.

If you are looking at historic performance, say you bought the stock 1 yr back and it was 100/- then and it is 150/- now-- then your present return= annualized return and the return % is 50%.

Always understand what annualized returns mean-- it can be quite misleading.

Happy investing.

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