Mutual Funds
Insurance
Calculators
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Know the expected returns for your investments
Compound Annual Growth Rate (CAGR) is a measure of the average yearly growth of your investments over a certain time period. It tells you the average rate of return you have earned on your investments every year. CAGR is very useful for investors because it is an accurate measure of investment growth (or fall) over time.
Many people look at their investment returns in absolute terms. Absolute returns tell you how much your investment has earned over the entire duration. Let us take a hypothetical example. Imagine that you have invested ₹20,000 in a mutual fund in 2015. The value of the investment is ₹35,000 in 2020.
In absolute terms, you have earned a 75% return on your investment over a five-year period. While this sounds very good, it does not give you the full picture. In other words, you do not know the average rate of return you have earned on your investment every year.
As an investor, it is important to know how well your investments have performed on an average year on year. CAGR can be very helpful in such a situation.
Let's briefly discuss the CAGR formula before we talk about the CAGR calculator.
The Compound Annual Growth Rate (CAGR) formula is:
CAGR =
(Ending balance/beginning balance)1/n - 1
Here,
Let's use this formula for the above hypothetical example.
CAGR = (35000/20000)1/5 - 1
OR
CAGR = 11.84%
This means, your investment in the mutual fund has given you an average return of 11.84% every year.
In this age of internet banking and online investments, online calculators have become very helpful. ET Money has designed a simple and elegant online calculator that can help you calculate the absolute rate of return as well as the Compound Annual Growth Rate on your investments.
All you have to do is select the rate of return of your choice and input the necessary details. Here is how the online calculator works:
First, you should choose the return type.
You can choose between:
Here is what you need to do if you choose Annual Return (CAGR)
Step I: Enter the initial investment amount
Step II: Enter the final/future investment amount
Step III: Enter the duration of the investment.
Step IV: Hit the 'Calculate now' button
When you hit the 'Calculate now' button, the calculator generates you the average annual rate of return on your investments in a matter of seconds.
In this case, the CAGR on your investment is 123.60%. In other words, your investment has given you an average of 123.60% return on your investment during both the years.
Here is what you need to do if you choose Absolute Return
Step I: Enter the initial investment amount
Step II: Enter the final/future investment amount
Step III: Hit the 'Calculate now' button
The calculator will give you the absolute rate of return on your investment. In this case, the absolute rate of return on your investment is 300%.
Note that you don't have to input the number of years because the absolute returns calculator does not consider the duration of investment in its calculations. It just gives you the rate of increase/decrease of your investments from its beginning value to its final value.
