Annualised Return is the average annual return on investment over a period of time where Compound Annual Growth Rate (CAGR) is an average growth rate over a period of several years.

You should know the difference between Annualised Returns and CAGR, which will help you to get the exact performance of any investment option. For e.g. An investment of five years, the 15% annualized return is actually 11.84% CAGR.

Let’s understand both one by one.

1. Annualised Returns: Annualised returns are calculated based on adding first year returns to the principal amount for calculation of next years returns and so on and so forth.

For example; You have invested Rs. 2,00,000 in one mutual fund scheme before 5 years which is now become Rs. 3,50,000. So at this point if you see the overall gain is Rs.1,50,000 which is 75% (this 75% is the absolute return on the principal amount invested) of invested amount. Here annualised return will be (75%÷5) 15% per year.

Formula to calculate Annualised Returns:

2. Compound Annual Growth Rate (CAGR): It is nothing, but the year on year growth rate over a period of time. It is also called “Net Yield”. CAGR gives you a better idea about the past performance of any investment.
For example: Investment amount of Rs. 2,00,000 for 5 years, the final investment value becomes Rs. 3,50,000. Here the CAGR will be approx 12% per annum ((Rs. 3,50,000/Rs. 2,00,000)^(1/5) -1).

Formula to calculate CAGR:

Lets us see how Annualise returns are different from CAGR.

Annualise_Return_vs_CAGR

The table above is showing an investment amount of Rs. 2,00,000 for five different years of performance. Even if for the entire five years the annualised returns are same i.e. 11.50%, but the CAGR is gradually reducing. So what did you get from this? The idea here is to tell you do not just enticed with any investment option showing very good returns, just to a recheck whether it annualized or CAGR.

While Investing, Should You See Annualised Returns or CAGR?

4 thoughts on “While Investing, Should You See Annualised Returns or CAGR?

  • February 17, 2013 at 11:18 AM
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    Thank you very much for such an important piece of information. Thanx once again.

    Reply
    • February 17, 2013 at 2:44 PM
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      Hi Meetesh,
      You are most welcome. Keep sharing your comments and queries.

      Reply
  • June 15, 2015 at 8:30 AM
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    How to check and compare performance of ulips ?one of the agent gave me an explanation that 8% is the maximum gross yeild that irda has allowed to explain ..and the product that he has explained had net yeild of 6.72% . I want to invent for longer term ..please help .what would be the other factors to judge the performance of ulips .

    Reply
    • June 15, 2015 at 10:19 AM
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      Hi Soumitra,

      If you are looking for long term investment for better yield then avoid ULIPs and look at either investing in Direct Equity or invest in Equities through the route of Mutual Funds. There are many free blogs & website teaching some basics and stock/MF schemes selection options. You may refer to them or take help of expert. Do not expect advices either from Banks or any Agents talking only for your good. Those could be biased due to their own benefits in the form of higher commission.

      Reply

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