What is a Relative Return?

Answer:
A relative return is the return that

an asset such as a mutual fund reaches over a period of time in relation to a benchmark. The relative return is calculated by subtracting the benchmark’s absolute return from the asset’s absolute return.

For example, if you want to calculate the relative return of a mutual fund that mirrors a particular index, you would need to know the absolute return of both the fund and the index during a given time period. Let’s say the mutual fund has an absolute return of 10% for the year and the benchmark index has an absolute return of 8%. In this case, the mutual fund outperformed the index by 2%. Its relative return is 2%.

Relative returns can be negative too. If the fund’s absolute return was 10% and the benchmark’s absolute return was 15%, the relative return would be -5% because it did not keep up with the benchmark.

Mutual fund owners expect the manager of the mutual fund to outperform the benchmark index and achieve higher returns to justify the management fees. Calculating relative returns gives investors a quick snapshot of how the manager is doing compared to the benchmark the fund uses.