Personal Finance: How to calculate Fund Growth Rate

Dear Readers,

Hope you are Njoying our post about different concepts of finance and investments. Now in this article i would like to preset some information about the different ways of expressing the growth rate in funds, like CAGR, Annualised rate, Absolute returns, Average returns.

Lets first look into what is absolute growth in funds.

CAGR (Compounded Annual Growth Rate) is a mathematical formula that provides a "smoothed" rate of return. It is really a method of calculating number that tells you what an investment yields on an annually compounded basis. it indicates to investors what they really have at the end of the investment period.

$\mathrm{CAGR}(t_0,t_n) = \left( \frac{V(t_n)}{V(t_0)} \right)^\frac{1}{t_n-t_0} - 1$

In this

V (t 0)

: start value,

V (t n)

: finish value,

t n - t 0

: number of years.

Actual or normalized values may be used for calculation as long as they retain the same mathematical proportion. also can be expressed as

# of years indicates number of years.

Absolute Returns is the returns that an asset achieved over a period of time. This period of time could be some days or months or years.This measure looks at the appreciation or depreciation that an asset - usually a stock or a fund - achieves over a given period of time.

Absolute Returns = ((V(te) - V(ts))*100)/V(ts)

V(te) - Value of the fund at the end of specified period

V(ts) - Value of the fund at the start of specified period

Annualized Returns is the returns describe the rate of returns for a whole year (annualized),

= ( ( Absolute Returns ) * 365 )/(Total No of Year the amount invested)

Average Returns is the average of the returns or gain in assets over a period of time.

Lets see this with an example.

If a person invested 100000(INR) in fund in year Jan-2003, and the fund has grown much faster in the year 2007 by Jan-2008 the fund value is around 3,00,0000(INR) which is equal to 200% returns ( this is assumption for illustration purpose. and in 2008 the fund recorded a down fall of say 50% the his fund value os 1,50,000(INR)

Table

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| Year | Jan-2007 | Jan-2008 | Jan-2009 |

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| Investment Value | 1,00,000 | 3,00,000 | 1,50,000 |

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| Returns ( % ) | NA | 200% | -50% |

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From the above table :

Absolute returns is

((V(te)-V(ts))*100)/V(ts)

= ((1,50,000-1,00,000) *100)/1,00,000

which is 50% ( this is overall growth )

CAGR is

= ((1,50,000/1,00,000)^(1/2)-1)

= (1.2247-1) which is 22.47% (compound annual growth rate)

If you consider that your investments give 22.47% compounded growth year on year the end value of your investment is 1,50,000.

Annualized retuns is

= (Aboslute returns * 365)/(Total No of days the investment fund)

= ( 50 * 365 )/ (730) which is 25%

Average retunrs is

SUM(R1,.....,Rn)/(# of years)

=(200-50)/2 which is 75%

Coparision of different types of messures:

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| Returns Type | Persentage |

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| CAGR | 22.47% |

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| Average Returns | 75% |

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| Aboslute Returns | 50% |

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| Annualized Returns | 25% |

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My recomendation is for you people is to look for CAGR and annualized returns before investing any fund at lease look for last 3 to 5 years fund performance if posisible looke at the fund performance since inseption.

For more information please contact us at

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