Compound Annual Growth Rate or CAGR is a commonly used term in mutual funds. It tells you the value of an investment over a given period and is useful in accurately measuring investment growth.
Investors can use this information to take a step towards their financial goals by leveraging the power of compounding. Moreover, investors can use this data to know about average returns from equity investments, where there are no guaranteed returns.
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So, let’s understand CAGR and how you can use a CAGR calculator to determine the returns on your mutual fund investments.
What Is CAGR?
Mutual funds do not generate fixed returns each year. So, the average returns generated by a mutual fund scheme for a specific duration is calculated using CAGR. For a clearer understanding, let us take this example:
Suppose you invest Rs. 1 lakh in a debt mutual fund. After a period of 5 years, your investment grows to Rs. 1.5 lakhs. Therefore, your returns on your investment is Rs.50,000 in these 5 years. That said, how can you determine the average returns generated by your investment in a year? Here, calculating its CAGR will help.
How to Calculate CAGR?
Let’s discuss the CAGR formula before we delve into the mutual fund CAGR calculator.
The formula for calculating CAGR is as below:
| (VE/VI) ^ (1/T) – 1 = CAGR |
In the above formula, VE = the investment value at the end of its term
VI = initial amount of investment
T = the tenure of investment (expressed in years)
For example, if in a mutual fund scheme, VE = Rs. 1.5 lakh, VI = Rs. 1 lakh, and T = 6
Then, we can calculate its CAGR by using the formula given above:
CAGR = (Rs. 1.5 lakhs/Rs. 1 lakh) ^ (1/T) – 1
CAGR = 6.99%
So, this scheme generates average annual returns of 6.99%.
Also Read: How to Calculate EMI in Excel
What Is a CAGR Calculator?
A CAGR calculator is a utility tool that helps you calculate your investment’s compound annual growth rate. As it is an online tool, you can easily determine the CAGR of your investment in a matter of mere seconds. So, all you have to do is submit the following three variables used to calculate CAGR in a mutual fund CAGR calculator.
- Beginning value
- Value after investment
- Duration of investment
How to Use A CAGR Calculator?
CAGR calculators are easy-to-use and will help you ascertain the compound annual growth rate of your mutual fund investments. To use this tool, follow these steps:
Step 1
Enter the initial value of your investment.
Step 2
Enter the final value of the investment.
Step 3
Submit the duration of your investment. Note that this figure is expressed in years.
Step 4
Now, simply hit the ‘Calculate’ button.
Moreover, as you click on the ‘Calculate’ button, the tool instantly generates the compound annual growth rate of your investment.
Benefits of Using A CAGR Calculator
Here are some of the benefits of using a CAGR calculator:
- It is a no-fuss online tool to calculate the CAGR by putting minimal information.
- The calculator helps you ascertain the returns from your investments.
- You can compare a mutual fund scheme’s rate of average annual growth over time against a relevant benchmark.
- You can easily evaluate the performance of the mutual fund investments in your portfolio. This tool also allows you to compare the performance of your stocks compared to others as well as the industry as a whole.
- CAGR returns calculator also helps you make better investment decisions.
How Can You Use CAGR to Invest in Mutual Funds?
Both novice and experienced investors can use CAGR before making an investment in the following manner:
- If you are planning to invest in a scheme, you can use its CAGR to gauge the annual returns generated by it in 1 year.
- You can also compare a mutual fund scheme’s CAGR to know if it is underperforming or outperforming the benchmark.
- Investors who have specific return objectives in mind can use the CAGR calculator to compare various schemes. As a result, it becomes easier for them to select a mutual fund scheme that meets their expectations.
- For long-term mutual fund investors with investments in multiple schemes, CAGR indicates the average returns offered by every scheme in a portfolio over the investment tenure.
- Investors with long-term financial goals can use CAGR to predict the expected duration of achieving their targets.
Final Words
A CAGR calculator proves to be useful for seasoned investors and beginners alike. Therefore, by adding CAGR to your investment analysis strategy, you can choose mutual fund schemes that align with your investment objectives and have the potential to offer higher returns.
That said, this tool is not suitable for SIP investments as it only takes the initial and final value of an investment. CAGR also does not account for an investment’s inherent risk, especially for equity investments wherein determining risk-adjusted returns is critical.
Frequently Asked Questions
Is higher CAGR better?
You can compare the returns from various investments by evaluating their CAGR. Generally, an investment with a higher CAGR is deemed suitable. For instance, a mutual fund investment with 8% CAGR is better compared to one with a 6% CAGR.
What does 5-year CAGR mean?
A 5-year compound annual growth rate evaluates the average growth of a market-linked investment over the preceding 5 years.
What is the 15x15x15 rule in mutual funds?
According to the 15x15x15 rule, an investor has to invest a SIP amount of Rs. 15,000 in an investment option that has a CAGR of 15% for a period of 15 years. As a result, he/she will build a corpus worth Rs. 1 crore after these 15 years.
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