What Is Compound Return?

Compound return is the situation where the return earned in one period is added to the principal so that it, too, generates a return in the next period — in short, "return on return." It is not only your starting principal that earns; the return you have already earned begins to earn as well. The longer the horizon, the larger this effect grows, because each period is computed on the grown value of the previous one. In everyday language this accumulation is called the "snowball effect."

Simple return versus compound return

The difference is easiest to see with an example. The numbers below are entirely illustrative; they are not a real fund's return, only round figures chosen to show the mechanism.

Suppose an investment earned 10% each year for three years:

• Simple approach (wrong): you add the returns — 10% + 10% + 10% = 30%.
• Compound approach (correct): each year works on the grown value of the prior year — (1.10 × 1.10 × 1.10) − 1 = 1.331 − 1 = 33.1%.

The extra 3.1 points is the "return on return": it arises from the first year's gain producing its own return in the second and third years. As the number of periods and the rates grow, this gap widens sharply.

Why fund returns are chained, not added

The practical rule that follows is: the returns of consecutive periods are not added; they are chained by multiplication. To find a fund's long-horizon return, you turn each period's return into a (1+r) factor and multiply them all:

Total return = (1 + r1) × (1 + r2) × … × (1 + rn) − 1

For example, suppose a fund (again with illustrative figures) returned +20% in year one, −10% in year two, and +15% in year three:

• The adding habit says: 20 − 10 + 15 = 25%.
• The correct compound calculation: (1.20 × 0.90 × 1.15) − 1 = 1.242 − 1 = 24.2%.

The two are not the same, because the second year's loss falls on the grown value of the first year. That is why the multi-year returns you see on TEFAS cannot be found by simply summing yearly returns; each period must be chained as a factor. The same logic applies when a year-to-date (YTD) return is assembled from monthly pieces.

Annualized return: the average of compounding

The measure that reduces compound growth to a single constant annual rate is called the annualized return (CAGR). It answers the question "if we grew at the same rate every year to reach the total growth, what would that rate be," and it is found by taking the root over the number of periods:

Annual compound return = (1 + total return)^(1 ÷ number of years) − 1

For the example above that grew 33.1% over three years: (1.331)^(1÷3) − 1 = 10%. That is, a constant 10% annual growth produces exactly that compound total over three years. CAGR makes returns over different horizons comparable on a common annual scale; but it is an average, and it hides the ups and downs experienced along the way.

Compounding cuts both ways

The compound effect applies not only to gains but also to losses — and it is not symmetric. If a value first falls 50%, returning to its old level requires a rise of not 50% but 100%, because it is now computed on a smaller base. For this reason sharp drops leave a heavier mark than rises of the same size, and large swings erode compound growth.

The same principle works on the interest side: when the return on a deposit or a debt is added to the principal and earns further return on that, it is called compound interest. Compound return and compound interest are two faces of the same mathematics — recomputing on a grown base.

To see step by step how a given amount would have compounded in a fund between two specific dates, you can use the calculator on the /fon-getiri-hesaplama page. That page gives no recommendation and makes no promise about future growth; it only shows the past figure in compound terms and leaves the interpretation to you.