A complete guide to CAGR in mutual funds

While most millennials consider mutual funds to be a safe haven to park their money, there are many who are still not very well aware of many aspects of mutual funds. One of them is the CAGR, Compound Annual Growth Rate. CAGR shows the compounded growth rate of the investment that has been made in mutual funds. It is thus, a very helpful score that helps you in gauging the average growth of a particular mutual fund over a specified time period.

Understanding Compound Annual Growth Rate

CAGR is a commonly used term used to determine how well a mutual fund, or any investment, is doing. When you are planning to make an investment or are viewing your investments in mutual funds, you see the growth in percentage over a specific period of time. Let’s say for example that a particular mutual fund has generated 15% returns over a period of 4 years, so this is the CAGR.

However, it should be noted CAGR does not imply that every year the mutual fund has this much return, rather there could also be some negative returns during this time. The score is an average return over a specified time period, where the volatility is ironed out. The best part of a CARG calculator is that it also takes the time period into account and better indicates the growth of the mutual fund.

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CAGR Calculator and its uses

There is a specific formula to calculate the compounded annual growth rate.

CAGR = [(End value/ Beginning value) ^1/n – 1] x 100

Here, n stands for the investment period.

Let us understand how a CARG calculator works with the help of an example. Suppose your initial investment was INR 10,000. After a period of 3 years, the final value of your mutual funds is INR 15,000, so as per the formula, (15,000/10,000)^(⅓) – 1, the CAGR would be 14.47%.

However, a much simpler and easier way to calculate the CAGR is the CARG calculator. Though there are many such calculators available online, using an accurate and user-friendly CARG calculator can make a lot of difference. In a few simple steps, you can make use of a CARG calculator and get a fair estimate of the average growth of your mutual funds in a specified time period.

1. Fill in your total investment amount
2. Fill in the final maturity amount
3. Enter the duration of the investment

In a matter of seconds, the CARG calculator will give you the result. The calculator helps you keep a track of your investments. You can draw clearer inferences and thus, have a better approach to your investments. Here’s all that your CARG calculator will help you with:

1. Comparing investments
   Let’s say that you invested INR 20 lakhs in real estate 10 years back, and you invested 3 lakhs in some mutual funds 4 years back. Here, making a direct comparison will be rather difficult, but this is where the CARG calculator will come in very handy. Despite the differences in the investments, you will be able to see a clear result of which investment has been more rewarding.
   
   
2. Evaluating your current and future scenarios
   When you know the current value of your mutual funds you would be able to evaluate the benchmark options. The CARG calculator will help you get realistic expectations from your investments.
   
   
3. Finding the right ways to invest
   When you have a clear goal, the CARG calculator helps you have a fair estimate of how much money or time is to be invested to reach a particular goal. Investing as per your goal becomes easier. You would be in a better position to make long-term plans.

For example, if you need your INR 10,000 to become INR 50,000 over a period of time, you would have to make an investment where the rate of return is 6.9%.

Let’s wrap it up

Albert Einstein considered compound interest to be the eighth wonder of the world. He believed that if a person understands it, he is in a position to earn it, and the one who doesn’t understand it will have to pay it. Understanding compound interest is no rocket science, however, you need to know the basics. A compound interest calculator is a fantastic tool that can be very helpful in making the right investment strategies to achieve your financial goals.