In India, mutual fund investment become so common among people. Now, the question is how many times investors would have checked and understood their mutual fund portfolio returns thoroughly? The numbers are few, most of them are not aware of it. One of the main objectives of any kind of investment is to get a good amount of return. Therefore, you must have proper knowledge and information about it. Today’s article will cover CAGR full form in Mutual Fund. CAGR is one of the mutual fund returns and quite significant calculation in terms of investment.
What is CAGR Full Form in Mutual Fund?
The term CAGR or Compounded Annual Growth Rate defines its meaning itself. Year-over-year growth rate OR mean annual growth rate of an investment over a specific period of time. Hence, it is a measurement of growth over multiple time periods. The CAGR calculation represents how much return an MF earned you every year during a certain period of time.
During a specific period of time, CAGR is the year-over-year growth rate of investment. It’s an imaginary number that describes the rate at which investment would have grown (only if it grew steadily). So CAGR is a way to smooth out the returns and this determines an annual growth rate on an investment whose value (fluctuated from one period to the next). In that sense CAGR isn’t the actual real return.
In order to calculate CAGR, few components are required, such as End Value, Beginning Value, Number of years. Before step into the main formula, let’s have a look at an example of CAGR.
As you can see in the above image that CAGR remains the same until one year but after that, it becomes compounded.
I have already mentioned that to calculate, you must have these following information:
- The first year of investment
- Investment of the current year
- Tenure of the investment.
Divide the end value by the beginning value with the power of one divided by the tenure period and subtracted one from the subsequent value.
Though you can find the CAGR calculator in many sites of Mutual Fund, still you should be acquainted with the formula and calculation process for your understanding.
CAGR for Multiple Cash-Flows
Internal Rate of Return
IRR is calculated by the returns given some amount at a fixed interval like after every 3 months or 1 yr. There should be an equal distance between each installment.
External Internal Rate of Return
At the beginning of the investment period, if an investment is done at the beginning and cash flows are received that are ‘not’ necessarily periodic like dividends. Here, the return on investment is calculated by using XIRR in Excel.
- Generally, for the period of 3 to 7 years, CAGR is used.
- It is a better measurement of an investment’s return over time.
This is the brief description regarding CAGR Full Form in Mutual Fund.