CAGR or Compound Annual Growth Return, must have heard about this term, but do you know, why it is necessary to know about this if you are investing in a mutual fund? CAGR is mainly related to the rate of returns in investment, or simply I would say that it is the rate of return responsible for the growth of investment, right from its beginning balance to ending balance.

If I add some twist, I can say, CAGR can be referred to as a job, where your invested money works and earn for you over a fixed period!

You must be thinking that, before I had heard that returns in mutual fund investment are calculated based on compound interest, then what is this CAGR?

Well, no need to get confused, you can simply understand the concept of compounding and CAGR through an example. We already know that through the SIP investment option in Mutual fund, an investor can start his investment with a mere amount of Rs 100 per month. Ravi, a farmer started his SIP with Rs 100 per year with a 10% interest rate on return. The following table shows the return he earned per year (return is calculated based on compound interest):

You can understand clearly, from the data table, how the return generated at the end of the year is taken as the principal for the next year, in this way return is calculated, through compound interest.

Now coming to CAGR. CAGR is calculated based on the following formula:

In the case of Ravi, if we take the ending balance of Ravi as Rs 146.41 and beginning balance as Rs 100, the value of n would be 4 years, then according to calculation, the CAGR value on Ravi’s investment would be 10%. The following chart will help you see the growth chart in Ravi’s investment according to CAGR:

Some facts that should be kept in mind is, CAGR isn’t a fixed return rate, rather it is a representational figure, calculated to show the approximation of return on an individual’s investment. CAGR only explains the rate at which investor's investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year.

Well, I think now you have understood the concept of CAGR. You can also find some details regarding CAGR from different financial managers, or the best option, visit us at Shri Ashutosh Securities Pvt. Ltd. and get a clear concept of CAGR because we understand that getting explained about something through experts is much easier and time-saving process than reading it by yourself and understanding it.

(Source: Various web sources)

#Names used in the article are fictional and are not concerned about any specific person.

*The write up is on best effort basis and the author doesn’t guarantee about its correctness. Any investment made based on this information will not make us responsible for the same.

(Mutual Fund investments are subject to market risk. Kindly read all the related documents carefully before investing. Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns)