CAGR Return: The most important metric for investors to know

How to calculate CAGR, what it means for your investments, and how to use it to achieve your financial goals.

The compound annual growth rate (CAGR) is a measure of the average annual growth rate of an investment over a specific period of time. It is one of the most important metrics that investors use to track the performance of their investments.

CAGR is calculated by taking the geometric mean of the investment's returns over the specified period of time. This means that it gives equal weight to each year's returns, regardless of whether they were high or low.

CAGR is a useful metric because it allows investors to compare the performance of different investments over time, even if they have different starting and ending values. For example, an investment that returns 10 per cent per year for 5 years will have the same CAGR as an investment that returns 20 per cent per year for 2 years and 5 per cent per year for the next 3 years.

How to Calculate CAGR:

To calculate CAGR, you will need the following information:

• The investment's starting value
• The investment's ending value
• The number of years that the investment was held

Once you have this information, you can use the following formula to calculate CAGR:

CAGR = ((Ending Value / Starting Value)^(1 / Number of Years) - 1) * 100

For example, if you invest Rs 10,000 in a mutual fund scheme and it is worth Rs 20,000 after 5 years, the CAGR of your investment would be:

CAGR = ((20,000 / 10,000)^(1 / 5) - 1) * 100

= 14.87%

This means that your investment has grown at an average annual rate of 14.87 per cent over the past 5 years.

What CAGR Means for Your Investments:

CAGR is an important metric to understand because it can help you to:

• Track the performance of your investments over time
• Compare the performance of different investments
• Make informed investment decisions

For example, if you are considering investing in two different mutual funds, you can use CAGR to compare their historical performance and choose the fund that has a higher CAGR.

CAGR can also be used to set financial goals. For example, if you want to retire with a corpus of Rs 1 crore, you can use CAGR to calculate how much you need to invest each month to achieve your goal.

How to Use CAGR to Achieve Your Financial Goals:

To use CAGR to achieve your financial goals, you will need to:

• Set a financial goal, such as retiring with a corpus of Rs 1 crore.
• Determine the investment horizon, which is the number of years that you have to achieve your goal.
• Choose an investment that has a CAGR that is in line with your financial goal and investment horizon.
• Invest regularly to take advantage of compounding.

For example, if you want to retire with a corpus of Rs 1 crore in 30 years, and you choose to invest in a mutual fund scheme that has a CAGR of 10%, you will need to invest Rs 2,411 per month.

Conclusion:

CAGR is a powerful metric that can help you to understand and achieve your financial goals. By understanding what CAGR is and how to calculate it, you can make informed investment decisions and track the performance of your investments over time.

Disclaimer: The article is for informational purposes only and not an investment advice.