How returns are measured

A fund can wave a big number and still be ordinary, because how a return is quoted changes how good it looks, so the exam makes you do the arithmetic. The simplest measure is absolute return: the plain percentage gain, (end − start) ÷ start, with no regard for time. It is honest for short periods but flattering over long ones, saying a fund “returned 100%” hides that it took five years to double.

That is why, for anything beyond a year, we use CAGR (compound annual growth rate), which spreads the compounded gain evenly per year so funds and periods can be compared. The formula is worth memorising: CAGR = (end ÷ start)^(1 ÷ years) − 1. Double your money in five years and the CAGR is 2^0.2 − 1 ≈ 14.9% a year, not 100%. But CAGR quietly assumes a single lump sum, which breaks the moment money goes in at different times, as in a SIP. There, the right measure is XIRR, which accounts for the timing of every cash flow; quoting a plain CAGR on a SIP is simply wrong.

Two refinements keep you honest. Point-to-point returns depend entirely on the start and end dates chosen, so a lucky window can flatter a fund; rolling returns average many overlapping periods and reveal consistency instead. And when comparing a fund to its yardstick, the standard is the Total Return Index (TRI), which counts dividends as reinvested, exactly what the fund itself does, making it a fair benchmark rather than a price index that ignores income. Master these, and no advertised number can mislead you.