Absolute return describes what a fund returns over a defined period of time, as opposed to comparing the return to other measures like a market benchmark.
Compounding is earning returns on the growth your investment makes. Longer term, it has the potential to increase the value of your investment significantly. Let’s say you start with an initial investment of $10,000. And on that you earn 10% p.a. every year after fees and tax. After your first year you’d have $11,000 (10% return on initial $10,000 = $1,000).
By the end of year two, your investment is now $12,100 (10% return on $11,000 = $1,100). The thing to note is that compared to the previous year your returns have increased by an extra $100. That’s because you earned 10% on your invested sum, and also 10% on the returns from the previous year. Now that extra $100 might not seem like much but using this example, after ten years your initial investment would have grown to $25,937 and the returns earned that year would have risen to $2,358. That’s the power of compounding.
Diversification is a risk management strategy that mixes a variety of investments within a portfolio. A diversified portfolio contains a mix of different asset types (such as fixed interest, equities, property and cash) in an attempt to limit exposure to any single asset or risk.
Relative return describes the returns achieved over a period of time compared to a benchmark as a measure of performance of funds.