Lesson 1 of 5
When you invest, your capital is at risk.
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Return is the figure behind many investment comparisons, headline rates and past-performance charts. Understanding what an investment’s return is helps you judge whether your money did any work over a given period.
Without a clear picture of what a return measures, it’s hard to compare two funds, two savings accounts, or two years of the same holding on equal terms. You risk comparing unlike figures. The number itself is simple. Reading it accurately can help you make more informed comparisons.
Almost every product you consider quotes a return somewhere. Many savings and investment products quote a return or rate (or show performance) somewhere in their information. A savings account shows an interest rate. A fund factsheet shows a percentage gain over a stated timeframe. A share price chart shows movement. All of these describe part or all of how your money performed, but they are not always calculated in the same way.
Savings interest is usually quoted as the Annual Equivalent Rate and doesn’t involve market price changes; investment returns can fluctuate and you can get back less than you invest.
If you misread a return, you might choose something that looks better on paper but delivered less once income and costs are considered. Or you might dismiss an option that actually met your needs. Once you can read a return properly, you can interpret performance information for yourself rather than relying on summaries.
A return is what your money earns over a stated period. It can be expressed in pounds or as a percentage, and it can be positive or negative. A loss is still a return.
What is the meaning of an investment return in practice? It is usually made up of two sources:
Income: Money paid to you while you hold the investment, such as interest from cash or dividends from shares.
Capital growth: Any change in the value of what you hold. If the price rises, that is capital growth. If it falls, that is a capital loss.
Total return combines both. It answers the question: taking income and value change together, what did my money earn over the period?
A return can be a gain or a loss. Both are still returns. Negative numbers are part of the picture.
Return has two parts: income (such as dividends or interest) and capital growth (the change in value of your holding). Different investments can lean more on one than the other.
Percentage return standardises the number so you can compare investment returns across different position sizes. The same pound gain can represent very different percentage returns depending on how much you invested.
Every return is tied to a time period. The same percentage means something different over a month than it does over several years.
Suppose you invest £1,000 in a fund. Over one year, the fund pays you £30 in income. At the end of the year, your holding is worth £1,050.
Your income return is £30. Your capital growth is £50 (the increase from £1,000 to £1,050). Your total return in pounds is £80.
To express this as a percentage, divide the total return by your original investment and multiply by 100.
£80 divided by £1,000 equals 0.08. Multiply by 100 and you have an 8% return over one year.
Now consider a loss. You invest the same £1,000. The fund pays you £30 in income, but at year end the holding is worth only £950. Your income is still £30, but your capital loss is £50. Total return: negative £20, or minus 2%.
The arithmetic is identical. The sign changes. That negative figure is still your return. It tells you your money shrank over the period, even after income.
Whenever you see a return figure, consider checking three things before you rely on it.
First, what period does it cover? A high-looking return can be less meaningful if it took many years to achieve. A smaller-looking return can be significant if it was achieved over a short period.
Second, does the figure include income, or only price change? Some performance charts (such as share price charts) show only capital growth. If you want the full picture, look for total return, which includes income as well.
Third, is it before or after costs and inflation? A gross return ignores charges. A net return subtracts them. A real return adjusts for inflation. These versions answer different questions, so compare like with like.
When comparing two investments, line up the same type of return over the same period. Percentage return helps you compare a £500 position against a £5,000 one without the pound amounts misleading you.
Past returns describe what happened, not what will happen next. Use them to understand behaviour and risk, not as a promise of future results.
Reading a headline percentage without checking the time period: A large return spread across many years can be very different from the same return achieved in a single year. Always attach a timeframe to the number.
Counting only price change and ignoring income, or the reverse: If you hold an income-paying investment and only watch the price, you understate your return. If you focus only on income and ignore a falling price, you can miss a loss.
Treating a past return as a promise: An investment that rose over one period can fall in another. Past performance is not a reliable indicator of future results.
Comparing returns calculated differently: If one figure is before costs and another is after, the comparison is not like for like. The same applies if one figure adjusts for inflation and the other does not.
Return is what your money earns over a set period, stated in pounds or as a percentage.
It has two parts: income (such as dividends or interest) and capital growth (the change in value of your holding).
A return can be negative, and a loss is still a return.
Percentage return lets you compare investments of different sizes on equal terms.
Always check the period, whether income is included and whether costs and inflation are accounted for before comparing figures.
An investment return is what your money earns over a period. It combines any income you receive, such as interest or dividends, with any change in the value of what you hold. The result can be expressed in pounds or as a percentage, and it can be positive or negative.
Add your income received to any change in value. Divide that total by your original investment and multiply by 100 to get a percentage. For example, if you invested £1,000, received £30 in income and your holding rose to £1,050, your total return is £80. Divide £80 by £1,000 and multiply by 100 to get 8%.
There is no single answer. What is a good investment return depends on the type of investment, the risk involved, the time period and your own goals. A return that is considered good for a lower-risk option may look very different from a return on a higher-risk investment that can move up and down more. Compare like with like, and remember that higher potential returns usually come with higher risk. Past returns do not guarantee future results.
Not quite. Return measures what your money earned over the period, often before you account for all costs and any tax due. Profit is what remains after charges, fees and any tax due (depending on your circumstances and wrappers such as ISAs). A positive return does not automatically mean the amount you keep is the same once costs and tax are considered.
