What is the full form of CAGR

CAGR: Compound Annual Growth Rate

CAGR stands for Compound Annual Growth Rate. It refers to the rate of return required for an investment to grow from its initial value to its ending value if the profits were reinvested at the end of each year of the investment's lifespan, i.e., when the investment has been compounding over a period. So, it is a measure of growth over multiple periods that measures the total return on investment by calculating the return every year and compounding them. We can say that it is the annual growth rate of an investment over time when the effect of compounding is taken into account. However, CAGR does not reflect investment risk.

The Formula and Calculation of CAGR:

CAGR = (EB/IB) ^1/n - 1

Where:

EB = Ending Balance
IB = Initial Balance
n = Number of years

To calculate the CAGR of an investment:

1. Divide the ending value of the investment by its initial value
2. Raise the result to an exponent of one divided by the number of years
3. Subtract one from the result

Benefits of CAGR:

1. It is the most accurate way to calculate returns for any investment whose value may increase or decrease over time.
2. It allows investors to compare the CAGR of two alternatives to evaluate their performance against other investments or a market index.
3. It is not influenced by percentage changes within the investment horizon that may give wrong results.
4. It is considered an accurate way to measure the overall return on investment than using an average returns method.

Mutual Funds and CAGR Calculator

The CAGR calculator can be quite useful for investors in mutual funds. You can use this calculator to determine how well your fund is doing and to make the required investment decisions. The following are some uses for a CAGR calculator:

Improved investment choices: The CAGR calculator is a very helpful tool to use each year as you assess your investing choices. The CAGR calculator, for instance, will show you the average annual return you have received over the last five years if you bought an equity mutual fund five years ago. This could help you decide whether the returns on the fund meet your expectations. If the fund is not doing well, you might want to think twice about making that investment in the future.

Compare the performance of various funds and benchmarks: You can compare the returns you get from one fund with those of other funds of the same type using the CAGR calculator. This can aid in your understanding of the mutual fund's performance in comparison to that of its competitors. For added clarity, you can also evaluate against the benchmark indices.