Understanding and Calculating Total Return: A Comprehensive Guide for Investors

Total return is a crucial concept for investors who aim to evaluate the true profitability of their investments. It represents the total gain or loss on an investment, taking into account all forms of income, such as dividends, interest, and capital gains. This article will explore the detailed steps and formulas for calculating total return, along with practical examples to illustrate the concept.

The Definition of Total Return

Total return is defined as the return computed by comparing all forms of return earned on an investment with the principal amount. This includes dividends, capital gains, interest income, and any other profits derived from the investment. The annualized rate of return is calculated after including all these benefits.

Calculating Total Return: Step-by-Step Guide

To calculate the total return, you need to consider all aspects of the investment. For example, let's consider an equity share with a face value of Rs.10 that yields a dividend of Rs.3. The share was purchased for Rs.200 but later sold for Rs.190 after one year.

Dividends earned: Rs.3 (30% of Rs.10) Loss on sale: Rs.10 (Rs.200 purchase price - Rs.190 sale price) Total return: Rs.3 - Rs.10 -Rs.7 (negative total return) Rate of return per annum: (-7 / 200) * 100 -3.5%

Types of Investments and Their Returns

The returns from an investment can manifest in different forms, such as interest income from debentures, bank deposits, dividends from mutual funds and equity shares, and capital gains from selling assets like houses. An investment might provide multiple types of returns, and total return captures all of these benefits.

Investment in Equity Shares

For equity shares, total return includes dividend income as well as capital gains from the sale of the shares. For instance, if you bought an equity share for Rs.200 and it provided a dividend of Rs.3, and then you sold it for Rs.190 after one year, your total return would be -Rs.7 on an investment of Rs.200, with an annualized rate of return of -3.5%.

Using Online Tools for Calculating Total Return

Nowadays, investors no longer need to rely on lenders to calculate the total return on their investments. Many online calculators, such as the FD Interest Calculator, can be used to estimate the return on investment.

How to Use an Investment Calculator

Here are the steps to use an investment calculator:

Determine your customer type: You will be asked whether you are a new customer, an existing customer, or a senior citizen. Select your deposit option: You will need to choose between a cumulative or non-cumulative investment option. Input your desired amount: Enter the amount you wish to invest. Enter the rate of interest: Provide the current interest rate for the investment. Choose the investment period: Indicate the duration of your investment in years. Click calculate: The calculator will then display the estimated return based on your inputs.

These calculators simplify the process of calculating total return, ensuring that investors can make informed decisions about their investments.