The sole purpose of an investment is to earn returns and create wealth. The higher the earning potential of an investment, the better it is. A challenge here is gauging investments correctly to understand the earnings potential. Particularly, when it comes to investments of recurring nature or of a compounding nature. Mutual fund investments are one such investment that requires a thorough understanding of how the earnings are computed. There are absolute returns and there is the Compounded Annual Growth Rate (CAGR).

The absolute returns calculation does not consider the period or tenure of the investment during which the returns have been earned. It simply takes into consideration the initial investment amount and the maturity amount.

Absolute Returns (%) = (Current Value (less)Principal Investment)/Principal Investment * 100

Lets understand this better with an example. If you had invested INR 1,000 at some point in the past and today this investment is valued at INR 1,200, then it would have earned 20% absolute returns.

Absolute Returns (%) =(12001000)/1000*100 = 200/1000*100 = 20%

You could have earned these 20% earnings over a matter of months or decades. Thus, it is extremely difficult to decide based solely on the absolute returns, if the investment is good or not. Absolute returns only tell you how much your investments grew by; they do not tell you anything about how fast they grew.

When comparing investment instruments and their earning potential thereof, both factors, how fast and by how much, are equally important. Absolute returns only account for the latter and thus we can say it is only half as efficient in determining the growth potential of the investment.

The CAGR accounts for the tenure of the investment period and thus gives a more accurate and comparable earnings percentage. To put it in a simple formula for better understanding:

CAGR (%) = Absolute Returns / Investment tenure (years)

For instance, we have two investment options, one wherein you earn absolute returns of 10% over 20 months and the other wherein you earn 5% absolute returns over 10 months. Now, in order to decide which option is the best, you will calculate the CAGR for both and then you can decide which one is better of the two.

For option one: CAGR = 10%/1.67 (20 months/12 months equals to1.67 years) = 5.98%

For option two: 5%/0.83 (10 months/12 months equals to 0.83 years) = 6.02%

Now that both the options are compared, you can see that option two is earning better returns than the first option. In spite of the fact that option two has absolute returns that are only half of the absolute returns of the first option, the former is better earning investment and thus you must invest in it.

When shopping for mutual fund investments (or any other investment for that matter) you need to ensure that you consider the CAGR and not the absolute returns. This is essential because absolute returns do not consider the time-period during which the returns were earned. It is this period that is critical in determining if an investment is good or not. To put it simply, it is not just about higher returns, it is about faster and greater returns.

Even if you are looking for a Systematic Investment Plan (SIP) to invest in, there are multiple options available in the market. You need to compare these options based on the generalized CAGR wherein each installment is considered as a separate investment to derive at an overall annualized return percent. The generalized CAGR is also known as the Internal Rate of Return (IRR).

The sooner you grow your principal, the better is the compounding it earns. With SIP, it is the cost averaging effect of the units purchased that enables you to earn faster and better returns. Whereas with investments wherein the principal and interest are reinvested over the tenure, it is the rate at which these short-term interest amounts grow the reinvestment principal. The higher this interest rate is, the faster your investment will grow.

In either case, it will be the CAGR or the IRR that will help you evaluate the options more efficiently when you want to invest in mutual funds and not the absolute returns. To invest in the right funds, download theAngel Bee mobile app. With its technology-driven, ARQ, the app helps you to invest in the funds best suited to your needs without any human interference and also helps to evaluate your investments better. So start investing today!

I have a lumpsum amount that Id like to invest.

Notice: Undefined variable: strDevice in/var/ bee/page-angel-knowledge-center-article.phpon line1043

Notice: Undefined variable: strOS in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1044

Notice: Undefined variable: strBrowser in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1045

Notice: Undefined variable: ip_addr in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1046

Notice: Undefined variable: prev_url in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1047

ELSS Funds: Meaning, Benefits Types of ELSS Mutual Funds Angel BEE

SIP Mutual Funds: Meaning, Types, Benefits Way to Invest in SIP Angel BEE

I have a lumpsum amount that Id like to invest.

Notice: Undefined variable: strDevice in/var/ bee/page-angel-knowledge-center-article.phpon line1156

Notice: Undefined variable: strOS in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1157

Notice: Undefined variable: strBrowser in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1158

Notice: Undefined variable: ip_addr in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1159

Notice: Undefined variable: prev_url in/var/www/angelbee/wp-content/themes/angel bee/page-angel-knowledge-center-article.phpon line1160

ELSS Funds: Meaning, Benefits Types of ELSS Mutual Funds Angel BEE

SIP Mutual Funds: Meaning, Types, Benefits Way to Invest in SIP Angel BEE

Mutual Funds are subject to market risk. Read all scheme related documents carefully before investing.

Angel Broking Limited (formerly known as Angel Broking Private Limited), Registered Office: G-1, Ackruti Trade Center, Road No. 7, MIDC, Andheri (E), Mumbai – 400 093. Telephone: (022) 3083 7700, Fax: (022) 2835 8811, CIN: U67120MH1996PLC101709, SEBI Registration No.: INZ000161534-BSE Cash/F&O/CD (Member ID: 612), NSE Cash/F&O/CD (Member ID: 12798), MSEI Cash/F&O/CD (Member ID: 10500), MCX Commodity Derivatives (Member ID: 12685) and NCDEX Commodity Derivatives (Member ID: 220), CDSL Registration No.: IN-DP-384-2018, PMS Registration No.: INP000001546, Research Analyst SEBI Registration No.: INH000000164, Investment Adviser SEBI Registration No.: INA000008172, AMFI Registration No.: ARN77404. Compliance officer: Ms. Namita Godbole, Tel: (022) 39413940 Email:

Choose from the best-performing Mutual Funds and kick start your

Notice: Undefined variable: prev_url in/var/ bee/page-angel-sticky-sidebar.phpon line442