The compounded annual growth rate is one of the most commonly used terms in the mutual fund industry. It represents CAGR that helps you gauge a mutual fund scheme’s average annual growth for some time.
A single stock or a mutual fund does not provide you with a constant rate of return every year. Hence it is important to calculate CAGR. If you reinvest then you need to know the profit earned on all the investments together. For instance, say you have invested in a single stock or mutual fund with a tenure of 5 years, the CAGR tells you about the gains to have by comparing your initial investment to the last one. This is applicable only if you reinvest your gains every year.
You might have been introduced to the many comparable investment tools that attempt to work and provide you with high returns. One of the most effective tools is known as a compound annual growth rate calculator that provides you the hypothetical constant growth rate for an investment or asset.
How To Calculate Compound Annual Growth Rate?
Many investors rely on absolute returns when they invest. However, it does not consider the value of what they are investing in. CAGR takes into account the 10 years they are investing for. It gives you the approximate rate at which your investment would grow without volatility. It is an excellent way to analyze the fluctuation experienced by the asset over a specific period. You may easily interpret its performance over a particular horizon. It is one of the excellent ways to see how a given investment rises when compared to its price. You can calculate CAGR in 3 easy steps-
- The investment that is made in the initial year is important and CAGR is calculated based on that only.
- The value of the investment at the end of the year does have a crucial role when we need to compare the investment made and the profit an investor has gained.
- Tenure of investment you can calculate CAGR using the formula of CAGR.
Let’s understand with the help of an example:
For example, if you have bought a stock of hundred in 2016 it is appreciated by 15% to rupees 115 in the year 2017 and further appreciated to rupees 125 in the year 2018.
Therefore the appreciation from the rate from 2016 to 2018 will be 25%. If you want to know the growth rate of your investment for the entire period you can use CAGR. For the above value, you can calculate it by using the formula i.e.
CAGR= (End Value/ Beginning Value) with the power of (1/years).
CAGR is a useful tool for the one who wants to estimate the return on investment. If you know how to calculate the growth rate, you can determine the profit on investment. Now you don’t have to perform any mathematical operations for calculating your CAGR. You can calculate CAGR in just a few simple steps:
- To determine the value of your investment and profit on it. You have to fill the values in the boxes given. The calculator will automatically determine the final value of your investment.
- If you want to find the growth rate, you can use the tool inversely, Find the growth rate easily.
- You can also use the advanced mode of this tool, it allows you to check the difference between the final and initial value and estimate the growth rate or percentage.
Compound Annual Growth Rate & Mutual Fund Returns
In the case of an investment avenue like a mutual fund, you have to ascertain whether it’s worth investing in or not. You are required to measure its performance for a given period. A mutual fund fact sheet would give growth returns across different time horizons of the fund; it may not be easy to judge the performance of any based on the multiple rates.
It is where CAGR has a slow growth rate and a single annual growth rate. It also brings compound interest into the picture. Most investment mutual funds use compound interest to compute the returns and it is the right way to measure fund performance.
What Investors Should Know About CAGR?
- The CAGR is not an indicator of sales that happens from the starting year to the last year. It depends upon the concentrated initial year or at the end of the year.
- Sometimes investment may reflect the same CAGR with one being more lucrative than the other. It could be because of the faster growth at the initial stage while growth happened in the last year for the other.
- The CAGR for investment periods ranging from 3 to 7 years with tenure may be sub-trends in between.
- The compound annual growth rate is different from year to year. Hence, you can see the changes once you apply for any mutual fund and start calculating the returns.
However, one must also focus on the market volatility while doing the financial planning. Using CAGR for tracking investment performance, can be a good idea. Yet, also look out for different options that can help you understand the performance.