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CAGR evens out market ups and downs to show how steadily your investment has grown over time.
CAGR shows the average yearly growth of an investment over time. (Representative Image)
Mutual funds are a popular way for people to invest and grow their money without having to pick individual stocks or bonds themselves. In a mutual fund, money from many investors is combined and managed by experts who invest it across different assets. Over time, investors want to see how well their investment is doing. That’s where CAGR, or Compound Annual Growth Rate, becomes useful.
It shows how much the investment has grown each year on average over a certain period. CAGR also smooths out the ups and downs of the market, giving a clearer view of long-term growth.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It reflects the average annual return of an investment over a specific time frame, assuming profits are reinvested each year. Unlike simple averages, CAGR shows how your investment has grown steadily over time, making it a powerful tool for comparing mutual fund performance.
How Does CAGR Work for Mutual Funds?
CAGR helps investors understand how much their mutual fund investment has grown on an annual basis, accounting for compounding.
The formula for CAGR is: CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) – 1
For example, if you invested Rs 1,00,000 in a mutual fund and it grew to Rs 1,80,000 in 3 years, the CAGR would be: (1,80,000 / 1,00,000)^(1/3) – 1 = 21.6 per cent.
This means your investment grew at an average rate of 21.6 per cent per year over 3 years.
CAGR is particularly useful in mutual funds because it eliminates the distortion caused by short-term market volatility. Instead of showing year-by-year returns, it gives a smoother view of performance. This makes it easier to compare funds that may have different return patterns over the years.
How to Use CAGR for Financial Planning?
– CAGR can help set realistic expectations about future returns.
– By estimating how much your investments might grow annually, you can calculate how much you need to invest to meet goals like buying a house, funding education, or building retirement savings.
– It also helps you evaluate and compare multiple mutual funds to choose the most consistent performer.
– When used wisely, CAGR can be a valuable tool for long-term financial planning.
CAGR serves as a valuable metric to evaluate mutual fund returns, providing a clear and consistent view of long-term investment growth. Understanding CAGR helps investors make smarter choices based on past returns. Just be sure to weigh its limits and seek expert advice.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
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