Life
General
Claims
Resources
Simplifying Life Insurance in India
Difference Between Absolute Return vs CAGR
Two terms often come up when measuring investment performance: absolute return and compound annual growth rate (CAGR). These two metrics evaluate an investment's performance. While Absolute Return measures the overall change in value added by an investment over a given period, CAGR gives the growth rate per year, ignoring fluctuations.
In this article, we'll explore the differences between CAGR vs absolute return and determine which is more accurate for assessing long-term investment plans.
Table of Contents
What is the Absolute Return in Mutual Funds?
Absolute Return in a mutual fund is the total returns that the mutual fund generates over some period without accounting for the time factor or compounding. It is solely the percentage change in the value of the investment from the starting point to the ending point.
For instance, suppose you invest ₹1,00,000 in a mutual fund, and after 2 years, the value grows to ₹1,20,000. So, in this case, using the absolute return is 20%, meaning that your investment has grown by 20% over the last 2 years. This measure does not consider how the return occurred annually or the effect of compounding during that period.
What is the Compound Annual Growth Rate (CAGR) in Mutual Funds?
The compound annual growth rate (CAGR) is the rounded yearly average growth rate of an investment in a fund over a given period, with the profits reinvested at the end of each period. CAGR is most valuable when comparing mutual fund or investment returns over several years because it evens out the effects of market fluctuations.
It represents the rate of annual compound that would produce the final value of the investment, whether the rate was the same each year. The CAGR is better portrayed than the former, in which investment is going on an average yearly scale.
For instance, take an example of investing ₹1,00,000 in a mutual fund, for which after 5 years, the investment becomes ₹2,00,000. Here, the starting value = ₹1,00,000, the ending value = ₹2,00,000, and the number of years is 5. By substitution in the formula, you get a CAGR of around 14.87%.
This translates to the investment growing at a compounded annual rate of 14.87% per year over the 5 years, indicating that despite fluctuations that might have occurred during the investment, there is a consistent growth rate.
Key Differences Between Absolute Return and CAGR
Understanding the difference between absolute return and CAGR is crucial for making the most profitable compromise. Below is a table indicating the significant differences present between each investment type to assist you in making your decision:
Advantages of Absolute Return and CAGR
Understanding the advantages of absolute return and CAGR helps us make informed decisions for our investment. To make your investment wiser, the following section has detailed the advantages of both absolute return and CAGR:
Which is Better - CAGR vs Absolute Return?
Investment choice depends on the type of returns desired. CAGR is most suitable for analyzing long-term growth, but the absolute return is best for evaluating short-term performance. It all depends on the investment's time horizon.
1. Calculation
CAGR calculates growth per year using the compounding basis over time. It, therefore, delivers stable long-term growth. Absolute return measures total percentage change over some time and compounding untold, indicating only initial and final value.
2. Use Cases and Investment Suitability
CAGR works best for long-term investments such as stocks and mutual funds. Absolute return is suitable for short-term investment and represents a clear-cut picture of how much one can gain or lose.
3. Return with Time Factor
CAGR prefers longer periods due to establishing a notion of continuous expansion, whereas absolute return is based more on fixed time. Comparatively, absolute return is favourable for long-run performance analysis.
4. Market Volatility Effect
CAGR smooths market fluctuations over time and gives stability. Absolute return is sensitive to market volatility. It reflects short-term gains or losses, and absolute returns can mislead in volatile markets.
Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about CAGR vs Absolute Return
Which is better for long-term investment analysis CAGR or Absolute return?
Which metric shows the total profit percentage Absolute return or CAGR?
Can CAGR be negative?
Yes, CAGR can be negative if the value of the investment falls within the designated period because it indicates a loss.
Does absolute return consider investment duration?
Why is CAGR preferred for multi-year investments?
How to calculate absolute return?
Absolute return is calculated using the formula:
Absolute Return = (Ending Value - Starting Value) / Starting Value * 100
How to calculate CAGR?
CAGR is calculated using the formula:
CAGR = [(Ending Value / Starting Value) ^ (1 / Years)] - 1
Which is better for short-term analysis: CAGR or Absolute return?
Does CAGR smooth out volatility?
Yes, CAGR smooths out volatility by taking the average growth rate within the investment period.
Can absolute return mislead performance?
Which metric helps in comparing two investments over time CAGR or Absolute return?
If an investment fluctuates annually, which is more accurate?
Is CAGR applicable for fixed deposits?
Which is better, CAGR or absolute return?
What is the difference between CAGR and absolute return?
Is CAGR and annualised returns the same?
Yes, CAGR and annualised returns are the same concepts. They represent an investment's average annual growth rate over a specific period, accounting for compounding.
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
Latest News
Read More
Renew & Download Policy Document, Check Challan, Credit Score, PUC & more
Anytime, Anywhere. Only on Digit App!
Rated App
Rated App
Scan to Download
