Understand the difference between the annualized rate of return

Understand the difference between the annualized rate of return

The annual interest rate and you will never lose money in investment and financial management!

We usually come into contact with the concept of an annualized rate of return when investing, and the annualized rate of return is widely used in various wealth management products launched by major P2P platforms. Although the performance of “annualized rate of return” and “annualized interest rate” methods are very similar, the two are very different. Many friends do not know what the difference is, and often confuse them, but in fact, there is still a big difference between the two. Only by clarifying the difference between the two can you avoid losing money in real investment.

What is APR?

The annual interest rate is the interest calculated in an annual interest cycle (one-year deposit interest rate), which is fixed and can be calculated. The so-called interest rate is the abbreviation of “interest rate”, which refers to the ratio of the interest amount to the deposit principal or loan principal within a certain period.

For example, the annual interest rate of 3.6% means that after the principal has been deposited for one year, the interest you will get is 3.6% of the principal. If you save 10,000 yuan, the interest you will get after 1 year is 10,000*3.6%=360.

Therefore, the annual interest rate is determined in advance by the financial institution, and it will not be arbitrarily changed during the user’s investment process. The annual deposit interest rate is formulated by the People’s Bank of China and reported to the State Council for approval. It is mandatory and must be strictly implemented by all financial institutions. Fixed-income products such as bank deposits and government bonds use the term “annual interest rate”.

What is an annualized rate of return?

The annualized rate of return is calculated by converting the current rate of return (daily rate of return, weekly rate of return, monthly rate of return) into the annual rate of return. It is a theoretical rate of return, not a real rate of return.

That is to say, the annualized rate of return is calculated, which is only an annualized display of short-term earnings. The annualized rate of return will be equal to the annual interest rate only if future earnings remain constant.

The annualized rate of return varies and is often seen in wealth management products on P2P platforms.

For example, a wealth management product sold by a P2P platform has an annualized rate of return of 7% for 60 days. People often think that they can get a return of 7% after 60 days. That is “annualized income”. If you buy for 1 year, the income you get, but you only invest for 60 days, then your income is 60 days/365 days; if you buy 100,000 yuan, the actual income is 100,000*7%*60/ 365=1150 yuan, not 100,000*7%=7000 yuan.

So “annual interest rate” and “annualized rate of return” are not the same.

What is the difference between the annualized rate of return and annualized interest rate?

1. Expected annualized rate of return: The annual rate of return determined or estimated by financial institutions when issuing wealth management products is not fixed but floating, that is, the wealth management product may or may not be reached when it expires, which requires customers Use self-judgment when preparing to buy.

2. Annual interest rate: For example, the annual interest rate of time deposits is formulated by the central bank and reported to the State Council for approval. It is mandatory and must be strictly implemented by all financial institutions.

Usually, high risk means high return, so the expected annualized rate of return is usually higher than the bank’s deposit rate. At this time, if the risk tolerance is strong, you can buy wealth management products. If the risk tolerance is average or weak, or the money is hard-earned, it is recommended to use a small number of deposits for wealth management or time deposits instead of buying wealth management products.

By aamritri

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