Total return is a performance measure used in investing. It takes into account the capital appreciation, as well as other returns such as dividends and interest, over a particular period. Hence, total return provides a complete picture of the investment’s performance.
Total return is especially useful when comparing performance across different asset classes. For instance, when comparing equity investments with fixed income assets. While equity investments might deliver impressive capital gains, their lack of regular income—like the interest from bonds—could make them less attractive for income-focused investors.
In calculating the total return of an investment, it considers:
1. Initial investment amount or principal.
2. Income generated from the investment, including interest and dividends.
3. The change in the price of the investment from the start to the end of the period.
In simple terms, the total return tells you the total percentage gain (or loss) of an investment, including all forms of income and capital appreciation.
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1. How is total return different from rate of return?
Total return measures the total income and capital appreciation of an investment. On the other hand, the rate of return refers to the gain or loss made on an investment, usually expressed as a percentage of the total investment cost.
2. Why is total return important in investing?
Total return is important because it gives a comprehensive view of an investment’s performance. It takes into account both capital appreciation and income such as dividends and interest, providing a complete picture of the investment’s profitability.
3. Can total return be negative?
Yes, total return can be negative. This happens when the total losses (depreciation and lack of income) on an investment exceed the total gains.
4. What is a good total return?
A good total return can vary based on the type of investment and market conditions. However, a positive total return that is higher than the rate of inflation is generally considered a good total return.
5. How often is total return calculated?
Total return is generally calculated on an annual basis, but it can also be computed for different time frames, depending on the needs of the investor.