Sunday, September 16, 2018

What is CAGR and What does it mean for your long term investment?

Hi, this is especially for existing mutual funds investors and the aspiring investors. The two things which come into our mind when we talk about equity or equity mutual fund investments are disciplined long-term investment and high-return over the long term. To promote the mutual fund schemes, AMCs showcase the past performance by CAGR. We often dont know what is CAGR return or how to verify the company claims. It is a simple calculation with help of square root calculator, you may check the square root of numbers with help of online calculators as well. 

Let us look at an example to simplify the word 'CAGR'

The below-mentioned chart shows a comparative study of CAGR return. 

But we need not always depend on charts to calculate the year on year return. 
#CAGR or #Compound Annual Growth Rate is the average rate at which an investment grows over time assuming that it was compounded (re-invested) annually (periodically). CAGR has nothing to do with the value of an investment in the intermediate years as it depends only upon the value in the first year and the last year of the investment tenure.

(Source - cagrcalculator.net)

CAGR = [{(Final NAV/ Initial NAV) to the power 1/n (n = no. of years)} - 1]*100

Let us consider 3 years back we bought a mutual fund scheme at NAV 100, and now the NAV now is at 200, then the CAGR would be - 

CAGR = [{(200100)}to the power 1/3 - 1]*100
           = [Cube root of 2 - 1]*100
           = [1.2599 - 1]*100
           = (0.2599)*100
           = 25.99/100 or 25.99% 

3 years CAGR return is 25.99%

Hope, next time you will calculate the CAGR return on your own.  


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