What is return?
Return is what your investment gave you over a period, as a percentage of what you put in at the start. It can have two parts: a change in price (of a share, gold or land, say) and income received (interest, profit, dividends, rent). Both together make the total return.
A return always needs a time period. “50% profit” in one year is one thing; over ten years it is something else entirely. So to compare investments of different lengths, returns have to be put on a per-year basis.
Say Nadia put Tk 10,000 into a share. In the first year the price rose 50%, to Tk 15,000. The next year it fell 50%, to Tk 7,500. “Plus 50, minus 50, averages zero” sounds right, but she has actually lost 25%, because the fall came on a bigger amount. So return is measured from the starting and ending money, not by simply averaging the percentages. The numbers are only an example.
Why it matters to an investor
- To compare fairly: if one return is quoted over three years and another over one, the comparison is wrong until both are turned into yearly figures.
- To see your real gain: what is left after tax, fees and inflation is what actually reaches your pocket.
- To check advertising claims: “double your money in 3 years” sounds big, but it is about 26% a year. Turning it into a yearly figure shows how unusual the claim is.
- To track your progress: to match the yearly return your goal needs against what you are actually getting.
The basic calculations
- Total return = (ending value − starting value + income received) ÷ starting value. For example, a Tk 100 share becomes Tk 105 in a year and pays a Tk 5 dividend: (105 − 100 + 5) ÷ 100 = 10%.
- Annualised return: turning several years’ total growth into “the steady yearly rate that would have produced it”. It is also called CAGR (compound annual growth rate).
- After-tax return: what you receive once tax deducted at source, brokerage or fund fees and other costs are taken out.
- Real return ≈ after-tax return − inflation. This tells you how much your buying power actually grew.
What to line up when comparing
Before putting two returns side by side, check: do both cover the same period? Are both before tax, or is one after tax? Is one a fixed, promised rate (like FDR interest) and the other a past result that may not repeat (like last year’s return on a share or fund)?
One more thing to watch: an advertised “up to” or “around” return is not a guaranteed return. And looking at the annualised return across several good and bad years gives a truer picture than judging by one good year.
Worked example
- Say you invested Tk 1,00,000 and after five years it was Tk 1,50,000. Total return: 50%.
- Dividing 50% by 5 to get 10% a year is wrong, because each year’s gain grows again the next year.
- The right way: (1,50,000 ÷ 1,00,000)^(1/5) − 1 ≈ 0.084, or about 8.4% a year. Check: Tk 1,00,000 growing at 8.4% a year becomes about Tk 1,50,000 in five years.
- If inflation averaged 6–7% a year over the same period, the real growth is only around 2% a year, and less if there were tax or fees.
Result: “50% in five years” sounds big, but it is about 8.4% a year, and much less after inflation. Put every return on a yearly, after-inflation basis before comparing.
Common mistakes
- Dividing a multi-year total return by the number of years to get a yearly return.
- Looking only at a share’s price and ignoring dividends, or only at the dividend and ignoring a fall in price.
- Comparing one return before tax with another after tax.
- Seeing one good year’s return and assuming every year will be like it.
Before comparing returns, line up three things: how much per year, how much after tax, and how much after inflation.