Understanding the **concept of total return** is important to get the whole picture of the investment performance. While most people simply look at the bottom line, whether the investment goes up or down, there are other components that make up for **calculating the total return**.

There are several components that make up for the total return. For instance, the total return on **stock fund** and **bond fund** are completely different in terms of calculating the growth and income of funds. For mutual funds, dividends, capital gains, and appreciation are calculated to get the **asset value**.

For individuals who are thinking of investing in stocks, mutual funds, and bonds, here’s a guide to finding out the total return. Analysts heavily rely on total return to get a **broader picture** of the **asset performance** for a long period of time.

## Why Total Return Matters?

Also known as the** annualized return**, the total return **measures** the **investment performance accurately**. Once an investor has the total return, he or she can have a good metric to weigh the investment against other assets of the same category.

The comparison will make better investment decisions over time. How the total return is calculated can **impact the investment portfolio** and maximize the return opportunity.

Technically, the total return is the rate of investment return on a single asset or a pool of assets, over a **specific period** of time. The single assets are stocks, and a pool of assets can be mutual funds. When all the components are added together, this comprises the investment’s total return.

## Components of Total Return

As mentioned, the total return has a **many components**, which are distinct from one another.

### Interest

A percentage of the loan that’s **paid back to the lender** or account holder. For investors, interest is presented in bond investments, real estate funds, and bank deposits.

### Capital Gains

The **profit earned **from** owning assets** like the stock, fund, a house, jewelry, artworks, etc., is called capital gains. There are two types: short and long term capital gains. For the short-term gains, profit is earned from asset sales held by the owner for one year or less.

Meanwhile, the long-term capital gains are profits earned for the sole ownership of assets for more than a year.

### Dividends

The dividend represents a **shareholder’s portion **of the **company’s profits**. These profits can be returned to the shareholder through a **dividend payment**, usually paid in cash. Dividend payments are common sources of **asset income** for a wide range of investments.

### Distributions

Distribution is the **payment **of interest, principal, or dividend by the** investment user**. It usually comes from a fund, bank, or investment account, from a **single stock issue**.

The total return is derived from two primary investment classes: income and cost basis. The income includes all interest paid out from bonds, deposit accounts, along with dividend payment and distribution.

On the other hand, the cost basis is the **market price** of an asset. It changes over time, like a stock or a fund.

The total return now becomes the **financial value**, expressed in percentage of asset investment. So, when the total return on a certain investment is 15%, this simply means the asset has **increased in value** by 15% since the owner purchased it.

## How to Calculate the Total Return

Determining the **investment’s total return** is easy. No need to call a financial planner to get the value. Follow these steps to calculate the total return.

- Get the original price of the investment you paid. For instance, if you bought 100 shares of a certain stock, and it cost $10 per share, then the total amount is $1,000. The key here is finding the present value of the investment.
- Add the income earned from the investment. Combine all interest, dividends, capital gains, and distributions from the investment.
- Add the investment price to the extra income generated from the asset.
- Divide the annual investment returns by the price paid for the investment. Now, this is the total return of the investment.

## Bottom Line

Understanding the total return is key to know the **appreciation **of the **asset investment**, by adding other asset-generating components.

Once the total return is factored in, you can have an idea of the investment’s actual value, and if this is working best for you or not.