CAGR stands for compounded annual growth rate. It is a metric that is used to measure growth. It is a far better measure than the simple growth that many investors are prone to calculate easily.
Contrast with simple growth
We all easily understand the concept of simple growth. If an investment of Rs 100 grows in value to Rs 150 in 3 years, we know the rate of growth has been 50%. However, the concept of simple growth has a significant shortcoming – it does not include the concept of time. In other words, one does not get any idea of how long it took for the investment to grow from Rs 100 to Rs 150. If it has happened in 2 years, it’s a nice growth rate. But if the fund has taken 6 years to achieve it, the growth rate is rather poor.
A concrete example
CAGR or compounded annual growth rate has no such shortcoming, and therefore, is a more efficient way of measuring the growth of your investments. Let’s try to understand with an example. If a portfolio grows from Rs 2 lakh to Rs 5 lakh in 5 years, the simple rate of growth is calculated as (5-2)/2= 1.5 or 150%. If you say that your investment has grown by 150%, you might be correct arithmetically but it could give one a wrong impression.
The CAGR would, however, work out to be 20.11% per annum. It means, the Rs 2 lakh investment has grown by 20.11% each year compared to the value of the preceding year. CAGR calculators are available free online.
What MFs routinely publish
If any mutual fund scheme has been in operation for more than a year, it publishes CAGR for its investors. Usually, CAGR for the past 1 year, 3 years and 5 years is published to offer a glimpse of how the fund has performed in recent times. If a fund is older than 5 years, it also publishes CAGR since inception as an indicator since the time the fund was set up.
Financial strategists often advise investors to compare the CAGR of different funds of the same category before zeroing in on anyone for investment.
(Disclaimer: This article is only meant to provide information. News9live.com does not recommend buying or selling shares or subscriptions of any IPO and Mutual Funds.)
If you invest in a mutual fund, most of the time the objective is to seek appreciation of investments. CAGR offers you an efficient yardstick. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
