What is CAGR (Compound Annual Growth Rate)?
The Compound Annual Growth Rate (CAGR) means, measure the growth over multiple years. That it is attention of due to the fact growth rates you gets from their first investment to your ending investment worth, if one assume that the investment is compounding over the time stage. It signifies the most valid how to determine and determine comes back for the individual assets, investment portfolios and a thing that can easily fall or increase in value over time.
“Compound interest, the eighth wonder of the world. He who knows it earns that it, person whom does not pays it.” – Einstein
A stock or mutual fund can not provide you constant growth every year. Their rates could modification at year to-year. In addition, when one make frequent investments, you will need to know the growth rate of the assets together. For example, when you invested in ELSS mutual funds for 5 years of time frame. CAGR lets you know how much your investment has grown yearly through our timeframe. Still, this really is applicable one assuming we re-invest the gains yearly.
How to Calculate CAGR (Compound Annual Growth Rate)?
The Compound Annual Growth Rate (CAGR) formula is stated as:
CAGR (Compound Annual Growth Rate) = ( ( EV / BV ) ^ 1/n ) - 1
EV = Earned Value / Earning Value of Investment.
BV = Beginning Value of Investment.
n = Periods (months, years, and so on.)
Example of CAGR (Compound Annual Growth Rate):
Let us assume that a person has invested 100,000 in ELSS Mutual fund for 5 years. During this 5 years of time frame, the valuation keeps of falling and increasing. Assume that 1st year the valuation was 75,000, 2nd year was 100,000, 3rd year was 150,000, 4th year was 125,000 and 5th year was 275,000 as valuation on invested capital.
We can calculate your CAGR with the investment as:
CAGR (Compound Annual Growth Rate) = (( 275,000 / 100,000 ) ^ 1/5 ) - 1 = 0.2242 = 22.42%
What is Good CAGR?
There is no definition for good CAGR (Compound Annual Growth Rate). But speaking generally, anything between 18% to 25% over 5 years of investment can be considered as a good CAGR when investing in stocks or mutual funds. Anything lower than 12% of CAGR makes other investment attractive (for example: real estate, debentures or other securities) than stocks or mutual funds.