Personal Finance

How Is CAGR Relevant In SIP Investment?

Evaluating the performance of your investment is crucial to know your progress towards your financial goals. Methods for measuring investment depend on the type of investment you have.

Compounded annual growth rate (CAGR) is a widely used and well-accepted return measure for any mutual fund investments. Let’s know more about compounded annual growth rate (CAGR) and its relevance in measuring mutual fund performance.

CAGR Relevant In SIP Investment

What is Compounded Annual Growth Rate (CAGR)?

CAGR or compounded annual growth rate is a measure of the average annual growth of your investment over a specific period. In simple terms, you can measure the annual average growth rate of your investment using CAGR. You can calculate CAGR using the following formula:

CAGR = [(Ending value/Beginning value)1/n – 1] X 100

Let’s understand this with an example. Let’s say you have invested INR 25,000 into a mutual fund which you are redeeming after 5 years of investment. Let’s assume the fund value at the time of redemption is INR 50,000. Let’s calculate CAGR for this investment.

CAGR = [(Ending value/Beginning value)1/n – 1] X 100

= [(50,000/25,000)1/5 – 1] X 100

= 14.87%

CAGR gives an accurate estimate of your investment performance when there is no volatility. Hence, CAGR is mainly used in measuring the performance of lump sum mutual fund investment. CAGR can be calculated easily online without any manual calculation hassles using the CAGR calculator.

What is the CAGR calculator?

CAGR calculator is a valuable tool available online that helps you know the performance of your mutual fund investment over the years. The CAGR calculator is designed based on the below CAGR formula:

CAGR = [(Ending value/Beginning value)1/n – 1] X 100.

It is quite simple to use the CAGR calculator online. You need to follow a few simple steps to calculate the CAGR of your mutual fund investment using the CAGR calculator:

  • Login to the CAGR calculator online.
  • Enter your investment details – total investment, final maturity value, and duration of investment.
  • Click on the ‘calculate’ option to know the CAGR of your investment.

It is simple and quick to calculate CAGR using the CAGR calculator online. CAGR calculator helps you evaluate the growth of your investment and know how you are progressing towards your financial goal. You can also compare the performance of multiple mutual fund investments using the CAGR calculator.

However, compounded annual growth rate or CAGR is the more relevant and widely used measure of performance for lump sum mutual fund investment. As CAGR does not take into consideration of multiple cashflows in a SIP investment that are considered new purchases.

When it comes to SIP investments, an extended internal rate of return (XIRR) is the right measure to evaluate the performance of your investment as it takes into account the multiple cash flows in an investment. You can calculate the SIP investment returns easily using the SIP calculator available online.

What is a SIP calculator?

SIP calculator is a mathematical tool available online which is designed based on the future value of money formula mentioned below:

FV = P X [{(1+r) n-1} / r] X (1+r).

In this formula,

FV – Future Value or fund value of your investment.

P – Amount of each SIP installment.

r – Estimated/expected rate of return (per month).

n – Number of installments.

SIP calculator available online helps you measure the performance of your investment without any manual intervention and hassles. The SIP calculator is simple to use. All you need to do is log on to the SIP calculator online and provide the basic details of your investment.

This includes the amount of monthly SIP installment, period of investment, and the investment strategy or the expected rate of return to calculate the return on your SIP investment.

SIP calculator is a great tool that helps you make a rational choice of the fund at the time of investment depending on your future goals and the risk profile.

Using the SIP calculator, you can input the target amount or the goal amount to know the approximate amount of SIP investment that you need to make every month depending on the type of fund you choose.

Both CAGR calculators and SIP calculators are useful tools to measure the performance of your mutual fund investment and also to make the right investment decisions.

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About the author

Sophia Britt

My name is Sophia and I live in the suburbs of Chicago. I offer real world experience to readers on how to save and smartly spend their money. Plus offer advice on organization, career, business, travel, health, home, education and life.

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