How to calculate Compound Annual Growth Rate

When investing or saving (Yes, they are different), it is often useful to calculate your returns to measure how your investments (or savings) are doing. This can be easily done by calculating CAGR or the Compound Annual Growth Rate (CAGR) of your investments.

Always calculate the real growth rate of your investments

What is CAGR


Investopedia defines CAGR as –

“CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.”


Formula for calculating CAGR

A simple formula for calculating CAGR is,


Compound Annual Growth Rate

A simple tool to help you calculate CAGR

We have created a simple CAGR Calculator, which you can use to calculate real returns for your investments. To download this calculator, click on this link. You will be taken to a Google Spreadsheet. Go to the File Menu, and click Download. Once the spreadsheet is downloaded, you can fill up the required numbers and the CAGR or Final Amount or Years will be calculated accordingly.

Click on image to go to the CAGR Tool

In case you have any problems downloading the calculator, just leave a comment below (with email) and we will mail it to you. The instructions for using the calculator are given in the sheet itself.

Hope you find it useful.

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Starbucks in India: Choose between a Coffee for Rs 150 or Rs 1.65 Lacs from SIP?

Starbucks has finally opened its first store in India. Being in Mumbai, we got an opportunity to check out the store on very first day. Lucky us… 🙂

 
Starbucks in India
From Starbucks (India) website
 Checking the menu, we found that a cup of coffee could cost anywhere between Rs 100 to Rs 200, depending on the type of drink. Though this does not seem much at first, if it does become a part of the routine for the young generation, then it could eventually turn out to be a bit costly. Assuming one makes a visit every week and shells our Rs 150 (in between Rs 80 and Rs 200) for a coffee, one would end up spending about Rs 600 a month on coffees.

Now, if this amount was invested on monthly basis (SIP) in a good mutual fund scheme, then assuming 15% pa growth, the amount would have become Rs 1.65 Lacs in 10 years. You can calculate the same yourself by using a SIP Calculator.

 
A Snapshot from SIP Calculator (Source: HDFC MF)
Now don’t think that we are against coffee or enjoyment. Instead of coffee, you can choose expenditures made on more unhealthy habits like cigarettes. And the result would be more or less same. All we want to convey is that if you are ready to invest systematically for the long term, you are bound to earn handsome returns.

SIP on Steroids – How to give boost to your regular investments?

(Latest Update) – You can read an updated and more detailed analysis of the PE and other ratios here.

We decided to use this insight to boost our SIPs.

For our analysis, we started with SIP of Rs 5000 every month, from January 2000 and kept on investing till December 2011. A total of Rs 7.25 Lac was invested in 145 instalments. Now we add the Boost. Whenever markets PE fell below 15, an additional Rs 5000 was invested in that month i.e. a total of Rs 10,000 was invested in that particular month. This happened in 23 of the 145 months and an extra Rs 1.15 Lac boosted the normal investment of Rs 7.25 Lac. This took total investment to Rs 8.40 Lac.

So what is the current value of the investment? Did the boost help in earning higher returns? Read further. The investment of Rs 8.40 Lac stands at a Rs 23.8 Lac. And if SIP was not boosted by Rs 1.15 Lac, it would have stood at Rs 19 Lac.

In an earlier post about timing the markets, we saw that it doesn’t make sense in trying to time the markets. If earning a better-than-average return is the aim, it is enough to invest regularly in a disciplined manner rather than trying to time the markets.

Let’s suppose that you as have decided to invest at regular intervals. This type of investment can easily be executed by means of SIP or Systematic Investment Plans.

Systematic Investment Plan (SIP) allows investment in markets at regular intervals. A normal SIP invests once every month.
There are many online SIP Calculators available that can be used to calculate SIP amounts based on your financial goals.
 
SIP is fine…But how to put them on steroids?
Before we answer this question, we would quote an analysis from our previous post on Analysis of P/E Ratios of Indian Equity Markets. Our study suggested that whenever an investment is made with markets trading at a multiple of less than 15 (PE<15), returns over 3 and 5 years have been phenomenal.

Above data shows that on increasing our investment by 15.9% (Investing more when market is trading at lower valuations), our overall investment value increases by 25%.

So to summarize,

  • But even after discussing the benefits of regular investments in markets & redundancy trying to time the markets, if you want to time the markets by investing in direct stocks, you should stick to shares of large & stable companies (Read about how to find Large Caps selling at massive Discounts!)