When you see that a mutual fund scheme has generated 10 or 12 or 15 per cent returns over 2-years, 3-years or 5-years, it is generally denoted as the compound annual growth rate (CAGR). But, if the CAGR for 5-years is 19 per cent , it doesn’t mean that every year the scheme has given that return. In some years, there could be a negative return, while in some periods, the returns could be positive. CAGR shows a mean annual growth rate that irons out the volatility in returns over a period of time.

When you invest in any investment such as an equity mutual fund where returns are not assured, you want to know how much is the return generated? Also, some of your investments are in lumpsum while you may also have a SIP in mutual funds.

CAGR in mutual funds is the returns generated in your mutual fund investments. For SIPs, it’s better to use the XIRR formula, while for a lump sum investment, CAGR calculator helps to find the returns.

The growth rate formula to calculate returns in mutual funds is compound annual growth rate or CAGR. CAGR basically takes into the duration for which the investment is held. It is the actual return on an annual basis assuming the gains are reinvested at the end of each year to arrive at the ending balance.

If you are holding any equity mutual fund scheme for more than a year, you will have to calculate the CAGR of the MF scheme to know how much your lumpsum investment in the scheme has generated. CAGR can be calculated even when your holding period is in years, months or in days.

Example: To calculate the CAGR in mutual funds using excel sheet, here is an example of CAGR calculation.

Let’s assume you had invested Rs 1 lakh in an mutual fund scheme three years back at an NAV of Rs 40 and now the NAV is Rs 80. The absolute returns looks to be 100 per cent but it has grown over 4 years, so compounded annualised growth rate gives a better picture of returns.

Here’s the CAGR formula

=(((ending-value/beginning-value)^(1/number of years))-1*100

So it will be,

=(((80/40)^(1/4))-1)*100

=18.92%

If the holding period is in months:

Formula:=(((ending-value/beginning-value)^(12/number-of-months))-1*100

=(((80/40)^(12/48))-1)*100

=18.92%

Similarly, if you know the NAV and the number of days:

Formula: =(((ending-value/beginning-value)^(365/number-of-days))-1*100

= (((80/40)^(365/1460))-1)*100

=18.92%

To calculate the CAGR of a mutual fund using formula or by using CAGR calculator, you need the initial NAV and the current NAV or the NAV at which the investment was redeemed. As the NAVs keep going up and down, the CAGR gives you an idea as to how much return has your fund generated on an annual basis.