Compound Annual Growth Rate (CAGR)

Let’s start with understanding the concept of Compound Annual Growth Rate (CAGR).

Compound Annual Growth Rate (CAGR) is a business and investing term that represents the mean annual growth rate of an investment over a specified period of time longer than one year. It’s one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. It measures a smoothed rate of return, which means it averages the returns over the investment period, taking into account compounding.

The formula to calculate CAGR is:

CAGR = (Ending Value/Beginning Value) n – 1

where:

• EV is the Ending Value of the investment,
• BV is the Beginning Value of the investment, and
• n is the number of years.

Example of CAGR Calculation for an Index Mutual Fund

Let’s say you invested in an index mutual fund tracking the Nifty 50 with an initial value of ₹10,000, and after 5 years, the value of your investment is ₹18,000. Using the CAGR formula, the growth rate would be:

$$CAGR\; 5\; years=\; (18000/10000)5\; –\; 1\; =\; 12.50\%$$

This means that the fund has grown at an average rate of 12.50% per year over the 5-year period.

2. Nasdaq 100 Index Fund: The annual returns for the Nasdaq 100 Index vary each year¹. For example, the return for 2024 was 5.69%, for 2023 it was 53.81%, for 2022 it was -32.97%, and so on¹. To calculate the CAGR for a 5-year or 10-year investment, you would use the CAGR formula with the starting investment and the ending value after 5 or 10 years.

$$CAGR\; 10\; years=\; (53338/10000)10\; –\; 1\; =\; 18\%$$

This means that the fund has grown at an average rate of 18% per year over the 10-year period.

3. Midcap 150 Index Fund: The same applies to the Midcap 150 Index Fund⁶⁷⁸. The returns vary each year, and you would need the ending value of the investment after 5 years or 10 years to calculate the CAGR.

Remember, while CAGR can be a useful measure to compare the average annual growth rates of different investments, it does not reflect investment risk. Therefore, it’s important to consider other factors and metrics when evaluating and choosing investments. It’s also recommended to consult with a financial advisor or do thorough research before making investment decisions.