Compounded Annualized Growth Rate (CAGR) - YouTube

hello and welcome to uh mf primer the term  that we are discussing today is the adr if  

you're a mutual fund investor or you wish to  become one this is a term that you will see  

everywhere in mutual fund fact sheets in newspaper  articles advertisements on billboards anything  

that refers to returns from mutual fund schemes  will have the term cagr so yes that's your clue  

it is related to returns you earn or rather have  earned from your mutual fund scheme the expanded  

form of cagr is compounded annualized growth  rate we also refer to it as annualized returns  

so what is it well um it is the return that  you've already earned from your mutual fund  

scheme by holding it for a period of time  so let's say you bought it five years ago  

and uh you've held it for so long so you've  earned a return from year one to year five  

we take that entire return and break it up into  smaller uh you know parts of annual returns  

and your cagr just represents that remember mutual  fund return is never earned in a straight line  

it is always up and down up and down there is  volatility involved market linked investments like  

mutual funds no matter whether it's in debt mutual  funds or equity mutual funds will have volatility  

returns will go up and down on an annual basis  if you start looking at the return every year  

you will get unnerved so what we sort of do is  invest and we leave it for you know three years  

four years five years whatever your time horizon  is and at the end of that when we look at returns  

we look at the cagr return which is basically your  total return broken up into the average annual  

performance why do we do that why do we complicate  it so much you see you know your fixed deposits  

just give you an annual sort of interest rate so  you know every year you'd get six percent or your  

real estate uh deals you talk about the absolute  return i bought it for one crore sold it for two  

crores we really don't talk about this annual  breakup that cagr does so why for mutual funds  

well uh for two reasons firstly it's easier to  compare you see we also recommend that mutual  

funds are a long term investment especially  equity mutual funds so you're holding them  

for many years when you hold them for many years  uh your different investments start at different  

points in time where you know if you're investing  across asset classes or across different mutual  

funds teams you have not bought everything on day  one and holding till uh you know uh year five and  

then selling everything so when you buy and sell  at different points in time you need something  

to compare the return so walks in your cagr cagr  helps you compare returns because it breaks down  

no matter what your holding period it will  break down return into annual buckets and  

so you know that okay my mutual fund scheme a  gave me this much analyzed return mutual fund  

scheme b gives me this much annualized  return um the second thing that it does  

is that you know it makes it easy to comprehend  what your return is for example if uh you know  

you have left your investment in for say 15  years or 20 years often happens with things like  

real estate where you bought like i said  on uh you know on a day 10 years ago and 10  

years later you're saying look i doubled my return  because my property is worth double the price and  

i'm happy uh but in 10 years if the doubling  has happened then you've earned just 7.1  

if the doubling has happened in say five years  then you've earned close to fifteen percent  

and and uh a year if the doubling has happened in  uh say three years then you've earned twenty six  

percent a year so it matters um your annualized  return matters just saying that you've doubled  

is not necessarily the the most clear picture  because it matters how many years you've taken  

to double uh so you have to um you know it's  easier to digest you cannot digest these big  

numbers after 15 20 years when your investments  are giving you 400 return also or 200 return we  

break it down into annual buckets so that it's  easier to compare and it's easier to comprehend  

as well what it is not is the return cagr is not  the return you're getting for your investment in  

the next year definitely not it is not a defined  return that you will get year on year it is just  

what you have already earned broken up into annual  buckets and make no mistake from mutual fund  

schemes the cagr return is not a guaranteed return  no matter what you do please do not think that  

this is the return you're going to get next year  as well or that it is a guaranteed return so there  

you have it uh cagr is definitely an important  part of your mutual fund investments it is  

annualized return for what you have already earned  not what you will be earning in future thank you  

for watching for more such conversations around  everything mutual funds do keep watching mx primer