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What is Compound Annual Growth Rate?

IndianMoney.com Research Team | Posted On Tuesday, February 11,2020, 04:33 PM

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What is Compound Annual Growth Rate?

 

 

Compound annual growth rate or CAGR helps measure the returns earned by an investment over a period of time. It measures growth of the investment over multiple time periods. You can measure and compare the past performance of all your investments and even project the future returns from them.

Take a Look at CAGR Formula:

CAGR = (EV/BV) 1/n – 1.

EV = Ending Value

BV = Beginning Value

N= Number of compounding periods.

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What is Compound Annual Growth Rate?

How to Calculate CAGR?

Let’s say you bought a stock at Rs 100 in the year 2015. This stock has appreciated to Rs 125 (This is a 25% appreciation) in the year 2016. It further appreciated to Rs 150 in the year 2017. Let’s calculate CAGR.

CAGR = (150 / 100) ½    - 1.

CAGR = 22.47%.

How to Calculate Returns?

Annualized Returns:

You invest in stocks whose prices fluctuate wildly each year. Knowing an assets return over a single year is of no use. Annualized Returns over longer periods of time show how the investment performs.

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Example of annualized returns:

You invested Rs 10,000 in XYZ fund over 10 years ago. The current value of the investment is Rs 23,000.

Total Investment Return = 23,800 – 10,000 / 10,000 = 1.38.

Annualized Return = (1+ Total Return) 1/n – 1.

Annualized Return = (1+1.38) 1/10 – 1.

Annualized Return = 0.0905.

How to Calculate CAGR for Mutual Funds?

Let’s understand how to calculate mutual fund CAGR over 5 years.

Year

Annual Returns (%)

1

10%

2

20%

3

-5%

4

6%

5

30%

How to Calculate CAGR and IRR?

(1+CAGR)^5   = (1+10%) * (1+20%) * (1-5%) * (1+6%)* (1+30%).

(1+CAGR)^5    = 110% *120%*95%*106%*130%.

(1+CAGR)   =  (1.72)^ (1/5)

(1+CAGR)   = 1.114.

CAGR = 11.4%.

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How to Calculate Returns on SIP of Mutual Funds?

Calculate Simple Annualized Returns:

The NAV of a mutual fund which is currently 20 may shoot to 25 in 7 months. Calculate simple annualized returns?

= (1+ absolute rate of return)

= (1+0.25)^ (365/210) – 1 = 47.38%.

Let’s Calculate CAGR of a Mutual Fund:                                                            

You have invested Rs 1 Lakh in a mutual fund 3 years ago. NAV was Rs 20 and now it’s Rs 40. Calculate CAGR?

CAGR = (40/20)^(1/3) – 1 = 25.99%.

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How to Calculate CAGR of SIP Mutual Fund?

Take a look at this table:

You have started a SIP of Rs 5,000 on January 2016. You stopped the SIP on June 2016. You redeemed Rs 31,000 in July 2016. Let’s calculate CAGR?

1/1/2016

-5000

2/1/2016

-5000

3/1/2016

-5000

4/1/2016

-5000

5/1/2016

-5000

6/1/2016

-5000

7/1/2016

31000

CAGR = 11.88%.

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