The CAGR Ratio shows you which is the better investment by comparing returns over a time period. You may select the investment with the higher CAGR Ratio. For example, an investment with a CAGR of 10% is better as compared to an investment with a CAGR of 8%.
What Is a Good CAGR? For companies with large capitalization, a CAGR in sales of 5% to 12% is good. For small-cap and midcap companies, a CAGR of 15% to 30% is good. Startup companies, on the other hand, should have a CAGR ranging from 100% to 500%.
Say you invest Rs 1 lakh. At 10% CAGR, the amount will grow to Rs 1.1 lakh in the first year. In the second year, it will be Rs. 1.21 lakh and so on.
A CAGR in sales of 5-12 per cent is suitable for large-cap companies. Similarly, for small businesses, a CAGR of 15% to 30% is satisfactory. Furthermore, a company's CAGR must be consistent over time.
What you really need to care about is how your investments perform over the span of many years. And based on the history of the market, 12% is not some magic, unrealistic number. It's actually a pretty reasonable bet for your long-term investments.
What is the Rule of 72? Here's how it works: Divide 72 by your expected annual interest rate (as a percentage, not a decimal). The answer is roughly the number of years it will take for your money to double. For example, if your investment earns 4 percent a year, it would take about 72 / 4 = 18 years to double.
Calculations and Example of Compound Return
If an investment of $1,000 ended up being worth $1,611 by the end of five years, the investment could be said to have generated a 10% annual compound return over that five-year period.
CAGR evens out all variations in the annual return rate of securities while considering an average of the same. For example, a stock market instrument can have a return of 25% during the first period of investment, 9% in the second year, 19% in the third year, and 17% in the fourth year.
A high CAGR with a low standard deviation suggests consistent growth with less risk. Look Beyond the Average: CAGR is an average, so the actual returns might have fluctuated significantly in some years. Consider the historical performance data to understand the investment's volatility.
CAGR stands for Compound Annual Growth Rate. It is a way to measure how an investment or business has grown over a specific period of time. It takes into account the effect of compounding, which means that the growth builds upon itself.
Disadvantage of CAGR: Smoothing and Risk
One disadvantage of the Compound Annual Growth Rate is that it assumes growth to be constant throughout the investment's time horizon. This smoothing mechanism may yield results that differ from the actual situation with a highly volatile investment.
Less than 15 percent: Although many may consider this rate rather unspectacular, a firm will double its size in five years while growing at a 15 percent rate. 15 percent to 25 percent: Rapid growth. 25 percent to 50 percent annually: Very rapid growth. 50 percent to 100 percent annually: Hyper growth.
Kotak Small Cap Fund posted a CAGR of 30.95% in the last three years. Quant Active Fund, a multi cap fund, gave a CAGR of 30.74% in the said period based on daily rolling return. Motilal Oswal Midcap Fund, a mid cap fund, gave 30.62% CAGR in the same period.
4. Investment horizon: Short-Term: A higher CAGR (12%+) might be good for short-term investments (1-3 years). Long-Term: For long-term investments (10-20 years), a CAGR of 10% to 12% is often sustainable and strong.
Key Takeaways:
Calculating CAGR requires the beginning value, the ending value, and the number of years, adjusting for compounding. A good CAGR varies by investment risk and volatility; approximately 9% per year, similar to the S&P 500's performance, is considered strong.
What is CAGR? CAGR, or Compound Annual Growth Rate, measures the rate of return of an investment over a certain period, in percentage terms. In other words, CAGR is the imaginary growth rate at which an investment is expected to grow steadily on an annually compounded basis. CAGR is also known as an annualised return.
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market. However, keep in mind that this is an average. Some years will deliver lower returns -- perhaps even negative returns. Other years will generate significantly higher returns.
For example, if one person borrowed $100 from a bank at a compound interest rate of 10% per year for two years, at the end of the first year, the interest would amount to: $100 × 10% × 1 year = $10. At the end of the first year, the loan's balance is principal plus interest, or $100 + $10, which equals $110.
With the right knowledge and strategies or the guidance of a skilled financial advisor, anyone can make strides to unlock their wealth potential and aim for a 10% return on investment. Various investment options might yield a 10%+ return.
Final answer:
It will take approximately 15.27 years to increase the $2,200 investment to $10,000 at an annual interest rate of 6.5%.