Annualised return converts a multi-period return into an equivalent yearly rate — enabling apples-to-apples comparison across investments of different durations.
Annualised return expresses any investment's total return as if it were earned uniformly each year. For a simple return over n years, annualised return = (1 + total return)^(1/n) − 1. This is essentially CAGR. It makes comparison meaningful: a fund that delivered 60% over 3 years has an annualised return of ~17.3% — which you can compare directly to a fund that delivered 15% per year.
If Fund A returned 60% over 3 years and Fund B returned 12% in 1 year — which is better? You can't directly compare 60% vs 12% without normalising the time period. Annualised return does that normalisation — Fund A's 60% over 3 years = 17.3% per year, making it clearly better than Fund B's 12% per year.
Annualised return = (1 + Absolute Return)^(1/n) − 1, where n = years.
Same as CAGR formula for a single lump sum investment.
For SIPs (multiple cash flows), XIRR is used instead.
Mutual fund factsheets always show annualised returns for periods ≥1 year.
Annualised Return = (1 + R)^(1/n) − 1