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2 mins Read | 3 Months Ago

What is CAGR in Mutual Fund and How it works

High dividend-paying stocks & Mutual Fund schemes

 

Strategically investing your hard-earned money is an effective way to build wealth over time. Mutual Fund is a popular choice among Indian investors, but how can you determine which ones offer the best returns? That's where CAGR or Compound Annual Growth Rate comes into play. Let’s see how to identify the highest CAGR Mutual Funds.

Understanding Mutual Funds 

A Mutual Fund is like a basket that holds a mix of stocks, bonds or other securities. When you invest in a Mutual Fund, you're pooling your money with other investors to create a diversified portfolio managed by professional fund managers.

Mutual Funds are a great way for individuals to access the stock market without needing extensive knowledge or time for research. They are designed to spread risk and offer potential rewards. However, the key to maximising your returns lies in choosing the right Mutual Funds and CAGR is a valuable tool to help you do that.

What is CAGR? 

CAGR or Compound Annual Growth Rate is a measure of the annualised growth of an investment over a specific period. It tells you how much your investment has grown on an average annual basis. CAGR smoothens the bumps and fluctuations in investment returns, providing a clear picture of how your money has grown over time.

CAGR is expressed as a percentage and is a crucial metric for assessing the performance of Mutual Funds. It helps you compare different investment options and make informed decisions about where to put your money.

How Does CAGR Work for Mutual Funds?

Imagine that you invested Rs 10,000 in a Mutual Fund five years ago and today it's worth Rs 15,000. At first glance, it seems like you've made a profit of Rs 5,000, right? Not so fast!

To calculate the CAGR, you need to consider the annual growth of your investment. In this case, the initial investment was Rs 10,000 and the final value is Rs 15,000 after five years.

To find the CAGR:

CAGR = [(Final Value / Initial Investment) ^ (1/n)] - 1

Where:

Final Value = Rs 15,000

Initial Investment = Rs 10,000

n = Number of years = 5

CAGR = [(15,000 / 10,000) ^ (1/5)] – 1

CAGR = (1.5 ^ 0.2) – 1

CAGR ≈ 0.2446 or 24.46%

So, the CAGR for this Mutual Fund investment is approximately 24.46%. This means that on average, your investment grew by 24.46% annually over the five-year period, taking into account, compounding.

Why CAGR Matters for Mutual Fund Investors 

Imagine that you invested Rs 10,000 in a Mutual Fund five years ago and today it's worth Rs 15,000. At first glance, it seems like you've made a profit of Rs 5,000, right? Not so fast!

  • Consistency

    CAGR provides a consistent way to evaluate the performance of Mutual Funds over different time frames

  • Accounting for Compounding

    Mutual funds reinvest your earnings, leading to significant growth over time. CAGR accounts for this compounding effect

  • Long-Term Perspective

    A high CAGR indicates that a fund has the potential to generate impressive returns over an extended period, making it attractive for long-term goals.

Identifying Mutual Funds with the Highest CAGR

Let's discuss how to identify Mutual Funds with the highest CAGR:

  • Research

    Start by researching Mutual Funds that align with your investment goals and risk tolerance, with a consistent track record. Understand the fund's objectives and strategies to ensure they match your aspirations

  • Check Historical CAGR

    Review the historical CAGR of the funds you're interested in, available on fund fact sheets or websites. Aim for funds that have consistently delivered high CAGR over multiple years

  • Consider Investment Horizon

    If you're investing for a long-term goal like retirement, prioritise funds with a history of strong long-term CAGR. These funds are more likely to provide sustained growth

  • Diversify

    Don't put all your money into a single fund, even if it has a high CAGR. Diversifying your investments across different asset classes and fund types can help spread risk and reduce the impact on your portfolio

  • Consult a Financial Advisor

    If you're unsure about which funds to choose, consider consulting a financial advisor for personalised guidance

  • Keep an Eye on Expenses

    High expenses can eat into your returns. Look for funds with competitive expense ratios to maximise your gains.

In the world of Mutual Funds, CAGR is your trusted companion for evaluating performance and identifying the highest potential returns. While a high CAGR is a positive sign, it's essential to consider your own financial goals and risk tolerance when choosing Mutual Funds. So, do your research, diversify wisely and let the power of CAGR guide you.

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