Investments, especially equity assets, do not grow linearly. Sometimes, they may appreciate it. At other times, they may see a fall in value. Then, how do you calculate the actual growth of your investments? That’s where Compounded Annual Growth Rate or CAGR comes in handy.
What is CAGR?
Compounded Annual Growth Rate or CAGR measures an investment’s average annual growth rate over a while. It can be considered a “smoothened out”rate of return because it computes the actual growth of your investment or asset over time.
For instance, let’s say you invested Rs.10,000 in January 2020, and by the end of the year, December 2020, your investment grew to Rs. 30,000. That’s a 200% return. Now, the following year, your investment fell to Rs. 15,000. That’s a 50% fall in value. If you take an average of the two, you will get a 75% average annual return for a year. But that’s incorrect. To get the actual value of your return, you need to compute CAGR, which will come up to 22.47% per year.
The calculation for CAGR involves a complex formula. Instead of going down that road, you can use a CAGR calculator to arrive at this figure. ICICI Direct’s online CAGR calculator will give your annual investment rate of return within seconds.
What is a CAGR Calculator?
CAGR calculator is an online utility tool that computes your investment’scompound annual growth rate over the years. You need to input three values: the initial value of your investment, your investment’s final value, and the number of years you have invested for.
The tool then calculates the CAGR for you. You can also use the tool to calculate the expected CAGR. The final value of your investment will change to the expected value of your investment at the end of the investment period.
Advantages of Using a CAGR Calculator
- Accurate Investment Return: CAGR is the most precise way of computing your average annual return on investment when there is a fluctuation in value. Using the CAGR calculator, you will get the right picture of how your investment has grown over time.
- Simple to Use: The formula for calculating CAGR is [(Future Value/Present Value)^1/Time of investment] – 1. That is a complex formula requiring detailed calculations. The CAGR calculator is a simple online tool that will help you arrive at your investment growth rate within seconds.
- Making the Right Investment: You can use the CAGR calculator to compute the return on investment on various financial products. For instance, you can calculate the CAGR on two stocks and then decide the best investment to make.
- Tracking Your Portfolio: When you make investments, it is essential to calculate the returns you are getting on it. You can use the CAGR calculator to monitor how your investments are growing and keep a close eye on your portfolio.
Caveats While Using CAGR
Despite CAGR being a practical way of computing your average annual rate of return on investments, it does have some downsides.
- CAGR does not account for investment risk.
- When you use a CAGR calculator to compute the CAGR of your investment, it does not reflect the volatility of your investment. Instead, it gives you a simple growth rate that is constant year after year. However, in reality, your investment value will fluctuate from one year to another.
CAGR is a valuable metric to get an accurate picture of how your investments have grown over time. Using the CAGR calculator, you can save time and effort to monitor your investments. ICICI Direct’s online CAGR calculator can help you in this regard. However, you should also keep the disadvantages of CAGR in mind when you use the tool.
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