How is CAGR different from absolute returns? Does investing in through SIPs in mutual funds yield more returns than lump-sum investments?
Aravind Kumar, Hyderabad
It is important to know about both these return types to understand the value of your investments. Absolute return is the increase or decrease expressed in percentage terms that an investment achieves over a given period of time. For instance, an investment of Rs 10 on May 25, 2015 appreciates to Rs 18 on May 26, 2017; the absolute return in this case is 80 per cent over two years. A better assessment of return in the case of longer duration investment is the CAGR or compounded annual growth rate. It is a useful tool when determining an annual growth rate on an investment whose value has fluctuated widely from one period to the next. CAGR isn't the actual return in reality as it is an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. CAGR is a way to smoothen out the returns. For the same two year period in the above example the CAGR will be 34 per cent. What this means is that if your investment of Rs 10 had grown at 34 per cent every year it would have been worth Rs 18 after 2 years.
