The Buyt Desk
Compound Annual Growth Rate (CAGR) is the term used for calculating the annual growth of investment over a duration. It is the term used for calculating how much you have earned on investment you made for a set period of time. There is a standard formula which banks and investment companies use to calculate the interest earned during the investment period.
Let’s start with the formula used for calculating CAGR. The formula for Compound Annual Growth Rate is:
CAGR = (Ending balance/beginning balance)1/n – 1
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Ending Balance = It is the amount your investment ended with for the investment period.
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Beginning Balance = It is the amount your investment started with for the investment period.
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N = The number of years you have invested.
What is the Benefit Of CAGR?
People often calculate interest earned on an investment in absolute terms. E.g. you invested 10,000 for five years and received 15,0000 after five years. If asked how much your money grew in five years? In the absolute term, you will say 40 per cent, but it is not. The CAGR calculates the earned interest percentage precisely. It gives exact details. All years of investment are not the same with respect to investment growth. In some years, it can do good, while in some, it can go negative too. CAGR presents the picture of the percentage of your money that grew over time. Using the CAGR formula, if you calculate the earned interest on the mentioned investment, it is 8.45 per cent on average.
CAGR For Mutual Fund Investor
It is a useful tool for mutual fund investors. It is because the performance of mutual funds varies according to economic conditions. With CAGR, you can calculate how your fund is doing and take necessary actions. Here is how this calculator can help you.
If you maintain a portfolio of mutual funds, you compare their performance through the compound annual growth rate calculator. Two mutual funds cannot be the same, and so their performance. With the CAGR calculator, you can easily calculate how your fund is doing in comparison to other funds and take decisions accordingly.
Conclusion – This is useful in calculating the growth of the investment. With the help of CAGR calculation, you would be able to evaluate the past performance of your investment but can predict its future return also.
