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# What is CAGR in mutual funds?

Compounded Annual Growth Rate (CAGR) is a measure of how much your investments have grown every year during a specific time period. CAGR, by definition, means the annual growth of your mutual fund investment over a specified time interval. It is a valuable indicator of the overall performance of the mutual fund scheme you have invested in.

CAGR is used for expressing mutual fund performance in periods over one year. Most Asset Management Companies (AMCs) report the CAGR of their schemes for 1-year, 3-year, 5-year and since inception periods in their monthly fund factsheets and other communication to investor where performance is disclosed.

## How to calculate CAGR?

Follow these steps to calculate CAGR:

Step 1: Determine the starting value of the investment. It would be the initial investment if you want to calculate CAGR from the start of the investment.

Step 2: Find out the final value of the investment for the time period.

Step 3: Work out the tenure over which the growth occurred.

Step 4: Use the CAGR formula: [(Final Value / Starting Value) ^ (1/Tenure)] – 1.

Step 5: Multiply the value with 100 to express the CAGR value in percentage.

## 3 things you must know about compound annual growth rate

After understanding ‘what is CAGR’, here are three other important things you must know about it:

Indicates overall performance: CAGR enables you to gain insights into the long-term performance of the mutual fund. You can easily compare different schemes by comparing their CAGRs since it tells you how consistently an investment has grown over time.

CAGR is better than calculating absolute returns: Absolute returns do not consider the tenure of the investment and may give you an incomplete view of the fund performance. CAGR helps you understand how your investment has grown each year since funds grow at different rates each year.

Not applicable to SIPs, STPs and SWPs: You will have to use other performance indicators for Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs) and Systematic Withdrawal Plans (SWPs) instead of CAGR in mutual fund, meaning CAGR is only applicable for schemes with point-to-point returns and considers the compounding effect where the growth each year affects the base value for following years.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.