Annualized Return converts a total return earned over any time period into the equivalent yearly compounded rate, allowing apples-to-apples comparison between investments held for different durations.
Formula: Annualized Return = ((1 + Total Return)^(1/n)) - 1, where n = number of years. For periods under 1 year, annualizing magnifies short-term noise and is generally not recommended.
Example: A mutual fund that grew from Rs.1,00,000 to Rs.1,75,000 in 4 years has a total return of 75%, but an annualized return of ((1.75)^(0.25)) - 1 = 15.02% per year.
When to use: Comparing two schemes held for different periods (3-yr vs 5-yr SIP), benchmarking against indices, or evaluating manager skill over a full market cycle. For SIPs and lumpy cashflows, use XIRR instead; for point-to-point lump sums, use CAGR.
SEBI caveat: Past annualized returns are not indicative of future performance. SEBI mandates that mutual fund factsheets disclose returns over 1Y, 3Y, 5Y, and since-inception periods. Always check standard-deviation and Sharpe Ratio alongside returns.
Related: CAGR, XIRR, Total Return, Rolling Returns.