CAGR – Compounded Annual Growth Rate
Compound Annual Growth Rate (CAGR) is a vital metric for evaluating the performance of mutual funds. In this listicle article, we will explore the meaning of CAGR, its calculation, advantages, limitations, and its significance in financial planning. Let’s unravel the world of CAGR!
CAGR Full Form:
CAGR stands for Compound Annual Growth Rate, a measure of the annualized growth rate of an investment over a specified period.
What is CAGR in Mutual Fund?
CAGR in mutual funds represents the annual growth rate of an investment’s value, smoothing out fluctuations and providing a clearer picture of its performance.
CAGR Return:
CAGR return is the compounded annual rate at which a mutual fund’s investment has grown over a defined period, typically presented in percentage terms.
How CAGR Works?
CAGR calculates the consistent rate at which an investment would have grown if it had experienced the same growth rate every year throughout the investment period.
What does Compound Annual Growth Rate mean?
CAGR is a standardized measure that reflects the actual growth rate of an investment, eliminating the impact of market volatility.
What does a Three-Year CAGR Mean?
A three-year CAGR considers the investment’s growth rate over a three-year period, offering insights into its performance during that timeframe.
How to use CAGR for Financial Planning?
CAGR aids financial planning by providing a long-term view of investment performance, enabling investors to make informed decisions based on historical growth rates.
What is difference between Absolute Returns and CAGR in Mutual Funds?
Absolute returns represent the total growth or decline in an investment, while CAGR reflects the annualized growth rate, considering the time value of money.
What is CAGR Formula and how to Calculate?
CAGR can be calculated using the formula mentioned below:
[(Ending Value / Beginning Value)^(1 / Number of Years) – 1]*100, offering a straightforward method to determine performance.
Step 1: Determine the Beginning Value (BV):
Identify the initial investment amount at the start of the period.
Step 2: Identify the Ending Value (EV):
Find the final investment amount at the end of the specified period.
Step 3: Find the Number of Years (N):
Calculate the total number of years between the beginning and ending dates.
Step 4: Apply the CAGR Formula:
CAGR = [(EV / BV)^(1 / N) – 1] * 100
For example, if you invested ₹50,000 in a mutual fund, and after three years, the investment grew to ₹70,000:
Step 1: BV = ₹50,000
Step 2: EV = ₹70,000
Step 3: N = 3 years
Now, apply the formula:
CAGR = [(70000 / 50000)^(1/3) – 1] * 100
CAGR = [(1.4)^0.333 – 1] * 100
CAGR = [1.139 – 1] * 100
CAGR = 0.139 * 100
CAGR = 13.9%
The CAGR for this investment over three years is 13.9% in Indian currency. This means, on average, the investment grew at a rate of 13.9% annually during the specified period.
What is CAGR in Stocks?
CAGR is equally applicable to stocks, indicating the annualized growth rate of stock investments over a specific period.
Advantages of CAGR:
a) Standardized Metric: CAGR offers a standardized measure for comparing investments of different durations.
b) Smooths Out Volatility: CAGR minimizes the impact of short-term fluctuations on investment analysis.
c) Long-Term Performance: It helps assess long-term performance, essential for strategic decision-making.
Limitations of CAGR:
a) Past Performance: CAGR relies on historical data and may not predict future returns accurately.
b) Ignores Timing: It assumes a consistent growth rate, disregarding variations in market timing.
c) Limited by Data Points: CAGR may not be reliable for investments with extreme values or intermittent growth patterns.
Conclusion:
CAGR is a powerful tool for understanding mutual fund performance, offering a stable and informative perspective on investment growth. By comprehending CAGR’s significance, investors can make well-informed financial decisions based on historical returns. Remember to consider its limitations and consult a financial advisor to ensure a comprehensive investment strategy.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
