If you’re an NRI looking to build a solid financial portfolio, the concept of CAGR is very important. The CAGR full form is compound annual growth rate and the actual CAGR meaning is the mean annual growth rate of an investment over a specific duration longer than one year. Of course, if you think about what is CAGR in finance, it assumes that profits, if any, were reinvested at the conclusion of every period of the lifespan of the investment.
What is CAGR (Compound Annual Growth Rate)?
Going by the definition of what is CAGR, it is the rate of return that any investment would have grown at each year to reach its final value over a specific interval. So, to understand the CAGR meaning with examples, it means that you can use the metric to calculate the smoothed annual rate of return for any investment that may have risen or fallen in value over a particular time. You can compare it to multiple other options to understand how well your investments have done against a benchmark or over time. Yet, it does not indicate investment risks or volatility.
Importance of CAGR for NRIs
If you are checking out good NRI investment plans, you should know that the CAGR is highly essential. It is the figure describing the rate at which your investment would have grown in case it had grown at the same rate annually and the profits were also reinvested at the conclusion of every year. You can use it to compare different investments or even multiple stocks, although the CAGR does not account for investment risk.
CAGR vs Other Investment Return Metrics
There are several ways to map CAGR in comparison to other investment return metrics. So, in terms of the CAGR vs absolute return debate, the latter indicates the total profit that has been generated by the mutual fund during a certain period and may be calculated by dividing the appreciation of the fund by the actual cost of the investment. So, for instance, if the fund has appreciated by about 50% in the last four years, the absolute return will stand at 50%. The CAGR of the investments in comparison is worked out as 10.67%. In fact, CAGR is often preferred over absolute returns while calculating the returns of mutual funds. The absolute return formula does not give much importance to the investment tenure and returns that have been reinvested into the portfolio. It works out the returns only over the actual amount of investments.
There is also the question of CAGR vs. annualised returns in this case. While often used interchangeably, strictly speaking, a simple annual average return is different from CAGR. The former indicates the arithmetic average returns that a mutual fund has generated during its tenure. So, you can divide the absolute returns by the period of investment. For instance, if the fund’s appreciation has been 50% over four years, the simple average return will stand at 12.5%. Yet, this does not account for compounding. The CAGR of these investments is about 10.67%, compared with which the actual geometric progression, including reinvested returns, is reflected.
How to Calculate CAGR
So, if you’re wondering how NRIs can invest in GIFT City, you can do it via USD-denominated insurance for NRIs. These are insurance cum investment plans which are USD-denominated, helping you combine life coverage with returns- in a widely recognized global currency (USD) that helps hedge against inflation and other risks. However, knowing how to calculate CAGR is also essential.
The CAGR formula stands as- [(Ending Value/Beginning Value)^(1/Number of Years)] - 1. You thus have to divide the investment value at the conclusion of the period by its value at the start of that period. Raise the result to the power of one divided by the number of years, and then subtract one from the final result. Afterwards, multiply by 100 to transform the answer into the final percentage. So, to take an example, the NAV of a fund stands at INR 160 as compared to INR 100 about four years earlier. The CAGR in this case is about 12.47%.
