The compound annual growth rate (CAGR) value highlights the annual growth in investments over a specific period. It showcases how much an individual has earned from investments on an annual basis during a given interval.
The formula for calculating CAGR involves dividing the investment value at the end of the period by the investment value at the beginning of the period. Then, increasing the result to the power of one divided by the tenure of the investment in years. Followed by subtracting one from the total. The formula works out to: CAGR= (End value/ Beginning value)1/n -1.
The returns on the investments are not consistent every year. A CAGR value provides insight into the compounded returns an individual can earn on an annual basis irrespective of the individual yearly performances of the mutual fund. CAGR is a quite useful tool to calculate the growth rate of a particular investment.
The value of CAGR can help to evaluate past returns or estimate the future returns of investments. At the same time, CAGR value is effective for lump sum investments. In the case of systematic investment plans (SIPs), it does not consider periodic investment into account as it regards the initial and final values for the calculation.
Considering that compound interest is used to calculate returns for mutual funds, CAGR value remains an appropriate tool to assess the performance of a particular fund. However, along with CAGR value, an investor must also consider another metric such as standard deviation to take into account the proportional risk of their investments.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.