How can I downsize my portfolio? – Part 2

Hi fellow Investors,

As discussed 2 weeks back (in our article - How many Mutual Funds should you have, an investor should not have more than 5-6 Mutual Funds in his/her portfolio. These should be restricted to 1 Mutual Fund scheme to invest in each Mutual Fund category based on your risk profile, goals, and other requirements. As a follow up to this, we told you that we shall tell you how to downsize/limit your portfolio to 5-6 Mutual Fund schemes.

The simplest way to do this is to first identify which Mutual Fund categories you need to invest in (based on your risk and goals) and identify the right schemes in each category (it is advisable to invest in schemes that are right for you and not look for the best schemes). This will give you your desired holding of Mutual Fund Schemes.

Once you have done that, it is important to take stock of mutual funds that you already have.

Make a list of all your investments in Mutual Funds. To do this, you can download your Consolidated Account Statement from CAMS Online. It will give you transaction wise details of all your mutual fund transactions provided you have used your existing email ID when doing the transactions. Otherwise, if you have an agent or use a platform for investing in mutual funds - you can ask them as well for a holding report.

Compare the existing holding of schemes with the list of desired holding schemes determined above.

SELL unwanted schemes

The way to downsize is to redeem the extra/unwanted schemes and invest the proceeds from the redemption into the desired mutual fund schemes. You can exit from some scheme and buy another scheme in the same category (hence, setting off your loss or gain). You will have to trim your portfolio to reduce it to 5-6 mutual fund schemes.


How should you decide what to sell?

Maintain your Asset Allocation

We always tell you to do this and this time around as well, it's the same solution.  Your investments in various asset classes should be made to achieve the right allocation. Even with Mutual Funds, your split between Debt & Equity should be based on your asset allocation. You can read more on this here - https://financial.wealthcafe.in/how-should-you-invest-right-now/

% of your portfolio - Small value funds

 You can choose to sell the schemes where the invested amount is low and they are only increasing the number of schemes you hold.

Underperforming funds
Analyze the performance of your invested funds and understand which are the funds you should have in your portfolio. Exit from risky funds and poor performing funds. This can be understood by checking the returns of your scheme with the underlying benchmark returns.   
Currently, almost all your investments pre-march would be performing poorly, hence it is important for you to check funds past consistent performance and not just last 2 months' results. 

Minimalism is the key to a cleaner and better portfolio as the reduced number of funds makes it easier for you to analyze your invested funds regularly and also, take a more informed decision with respect to your investments. Also, the cost of managing these funds is reduced.

Where you have just started investing, keep in mind that every time you want to invest more money, you need not invest that in a new mutual fund scheme. You can instead increase your SIP amounts in your existing schemes.

Consult an Advisor
Where you already have 15 - 20 Mutual Funds and are finding it difficult to select which ones to keep and which ones to let go, it is advisable to get the assistance of a financial advisor who will go through your risk profile and advise you exactly which mutual funds to hold and for how long. Where you need an advisor/financial planner for your specific financial needs, you can reach out to us at  https://ria.wealthcafe.in/


One size does not fit all!

Hi fellow investors,

Ever walked into the ladies' shoe section of the mall during the sale season?

They have long tables filled with all kinds of shoes and each table has the shoe size written on it. I happened to have very petite feet (a size 36) and I look forward to the sale season to upgrade my shoe collection. And during the sale, I go to the mall oozing with enthusiasm to pick up some great heels at flat 50% off, fight off scores of other women and claw my way to the front of the table only to find ugly black chappals in my size!

However, at the end of the store, there is a table filled with some amazing shoes and without the commotion around it, but they are SIZE 41 - 42. Ugh! I hate having small feet during the sale season. All the best brands have their best discounts on shoes in the 40-42 size range. They even have color options! They have so many great options that I am even tempted to try them on just to see what they'd look like. But I do NOT buy these shoes because they are NOT my SIZE. They may be the BEST shoes out there but I DO NOT BUY it. Why would anyone spend money on shoes that would ever fit them, right?

So, in spite of knowing not to buy shoes that do not fit them, why do people invest without knowing what is the right fit for them?

Everyone is always searching for:
'The best Mutual Funds to Invest in?' 
'Tell me where can I get the maximum return possible'
'How much returns will I make through this investment'

The best returns are in the shoe of size 42 but clearly, they do not fit me and will only be a waste of money and similarly, so will your investments if they are bought considering only the 'best returns' as criteria.

You need to invest your money in the investments which are 'RIGHT' for you as per your risk profile. The investments which fit perfectly well in the asset allocation determined by your risk profile just as my feet size determine the final shoe design I pick.

What is this Risk Profile?

The risk profile is your risk-taking capacity and how much risk you can take so that you can peacefully sleep at night. It is based on your ability to take a risk and your willingness to take the risk. Where the ability is more a function of your age, your money, and your goals, willingness is completely behavioral and is determined by your life experiences and education.

Before you start your investments, it is very important that you take a risk profile test (we have attached an indicative risk profile for your reference) and know what is the RIGHT Debt-Equity mix for you.

High Risk = High Returns
Low Risk = Low Returns

Where you make the investment decision based on the risk you are taking, you will eventually be able to achieve your goals with peace of mind and not worrying about the volatility in the markets.
Shouldn't that be the whole point of investing in the first place?

Hence, don't just run behind the highest returns, they might not be the right fit for you. Instead, understand what you want to achieve by investing, plan accordingly, and then invest.

Disclaimer -  These articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.  


Should I pause/stop my SIP?

The tides may appear to have calmed down for now but we never know what is in store for us next. Some relaxations have definitely come out and some more are expected. However, this does not cure COVID 19, it just prepares us for the new normal of living with Covid as we begin to resume our old routines.

While there are many uncertainties looming over us, including pay cuts and job loss, some of you guys asked us if they should discontinue/pause their SIPs under these circumstances?

Like always my answer to this will depend upon how much extra cash you have left each month and if there is an Emergency Fund (equal to 4/6 months of your monthly expenses) in place to take care of these uncertain times.

  • If you have not been affected by pay cuts, you must continue your SIPs as before. Additionally, since you are spending less than before, the savings again must get channeled into your investment portfolio.
  • If your pay has been reduced, counter that with the reduced spends, and if your total savings are still the same, continue with your SIPs. If the savings are lower, then you can dip into your Emergency Fund to ensure your SIPs don’t stop. If you have not set up an EMergency fund, then you will have to reduce your monthly SIP to match the amount you are able to save each month.
  • If you have lost your job, or your salary has been paused, then you can fall back on your emergency fund to take care of your monthly expenses. SIPs will have to be stopped and will suffer.

What is the point of SIPs right now?

SIPs (known as systematic investment plans) are where you invest a fixed amount of money into a choice of your mutual fund at regular intervals (generally monthly). It is an automated process and the amount is debited from your bank and mutual fund units credited to you.

Buying in a falling market reduces your cost giving you higher benefits when the market goes up. To understand this better, let us run you through this example.

You get more units when the fund’s NAV (market price) is lower
You get less units when the fund’s NAV (market price) is higher.

As of 10 May, the NAV is priced at 85, hence the value of your investments will be 54,880 @5% loss.

Instead of doing SIP, had you invested a lump sum of INR 60,000 on 15 November, you would have got only 600 units (as opposed to 669 here) and the value of your investments would be INR 51,000 on 10 May 2020 (at a 15% loss). 

No one knew that the market would fall so drastically and be so volatile in 2020, but your SIPs definitely help you to invest in a staggered and make most of the down market.

Everyone wants to know when we will reach the bottom to buy the maximum number of units. But it is anyone’s guess when the markets will reach the bottom or what the bottom price is.  Hence, SIP is your friend in such markets. When you continue your SIPS, your amount keeps buying a varied number of units (more in a down market) and thus, helping you to average your cost of buying.

Do not stop your SIPs now just because the markets are down, for all you know this time may turn out to be a bargain and help you get better returns in the future.


Public Provident Fund (PPF) – Things to note

Public provident fund (PPF) is a tax-free investment product that comes with a tenure of 15 years. You need to make the periodic investment to PPF every year and the minimum you can invest is ₹500 going up to ₹1.5 lakh a year. You can choose to invest a lump sum amount in the year or invest a sum every month. You can hold a PPF account in your name or even open one in the name of a minor but together the contributions can’t exceed ₹1.5 lakh.

PPF’s returns are pegged to the average government securities (G-secs) yield and are declared every quarter. Currently, it offers a rate of 8% per annum.

You can maximize your return by investing early in the year as then your money will earn interest for the entire year.

Being a tax-free product, the contributions up to ₹1.5 lakh qualify for a tax deduction under Section 80C of the Income Tax Act. A deduction reduces your overall tax liability.

PPF accounts can be opened in banks or post offices, but you need to be a resident Indian.

Things to Note (lesser known facts of PPF)

1. Opening PPF accounts in joint names: Everybody knows that opening PPF accounts in joint names is not allowed. However, parents are allowed to open a PPF account on behalf of a minor child. In case both parents are not alive or a living parent is incapable of acting, then a court-appointed guardian is eligible to open an account on behalf of a minor. But while parents are allowed to open accounts on behalf of minors, both parents can’t open two separate accounts on behalf of the same minor. When the minor attains majority, then they will be treated as the account holder of PPF and not the legal guardian.

2. A PPF account cannot be attached: The money in the PPF account is yours and nobody can take it away. Yes, a PPF account cannot be attached by a person or entity to pay off any debt or liability. This is the gold standard of safety of an asset. Do remember our homes, if taken on a mortgage, can be taken away if we fail to pay the EMIs. But in case of PPF money, even a court order or decree cannot make a person liable to pay off her/his debts using the money from her/his PPF account. This is great protection for millions of PPF account holders. There is one caveat though — the Income Tax authority is free to attach and recover the dues of an account holder.

3. Nomination of nominees: PPF allows you to nominate more than one person. You can nominate one or more nominees to your PPF account if you so wish. The nomination is not allowed to an account opened on behalf of minors. You can change or cancel the nomination at any point of time during the PPF account period, but do note that you cannot nominate a trust to your PPF account. But being the nominee does not mean you will be allowed to continue the account. All the nominee gets is the right of ownership in terms of an authority to collect the money on the death of the subscriber and retain the money as a trustee for the benefit of the persons who are entitled to it under the law.

4. Misunderstanding about lock-in period:  As per the PPF scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. So, it does not matter in which month or date the account was opened. If your first contribution was made on June 1, 2018. The lock-in period of 15 years will be calculated from March 31, 2019, and the year of maturity, in this case, will be April 1, 2034. Do remember this technicality if you are counting on your PPF account maturity sum for an important time-sensitive financial event, like retirement or buying a house or repaying an important loan.

5. Discontinuation of PPF account: Some investors often forget their PPF account. Lack of minimum deposit can lead to discontinuation. If your PPF account is discontinued, you will still get the amount along with interest, but only at maturity. Such a discontinued account will earn interest every year till maturity is reached on the balance available for each year. Even withdrawal or loan facility is not allowed on such a discontinued account. If you want to avail loan or withdrawal facility, you will have to continue the account by paying the prescribed penalty and minimum subscription for the discontinued period. These rules tell you that you should do everything in your power not to let your PPF account become a discontinue done. Keep a note of the account and invest the minimum amount every year.

Wealth Cafe tip – If you do not have an Employee provident fund or not using your EPF for retirement goals and are looking to invest for long term goals like retirement, PPF is a great option. It gives tax savings, security, and good interest rates.



Insurance is not Investment

When you Invest your money, you part with your money today to get something in return tomorrow. whereas when you get insurance for something, you expect to get financially covered in case an unforeseen event for which insurance is taken occurs.

Thus, term insurance is a pure insurance product, it is not for your living but in case you die, you get the money. According to us, Term Insurance is the cheapest and best way to insure your life.

However, many people feel otherwise and believe that they want to put money in insurance only when they are guaranteed that they shall get something in return either alive or dead. In this bargain, you are just investing (with insurance as add on) but not getting adequate insurance for yourself.

We have already discussed, how a Term Insurance must replace you Financially and how to compute the amount of your sum assured in the article – how to compute your sum assured.

In spite of this many people believe otherwise and want to get returns for their insurance.

Let us understand the same with an example

If you spending INR 5000 for your insurance needs each month.

Case 1 – Where you buy a Life insurance product in which you get an amount on maturity where you do not die like a basic money back policy or an endowment plan. 

Particulars Amount
Premium Per Month              5,000
Premium Per Annum            60,000
Number of years covered under the policy                   30
Total Premium Paid        18,00,000
Sum Assured under this Policy        70,00,000
Amount received on maturity if the person survives        55,30,890

The Rate of Return, in this case, is 6.5%

Case 2 – When you buy a Term Insurance and invest the balance amount in a mutual fund.

Term Insurance Premium per month                    850
Term Insurance Premium per annum               10,200
SIP premium amount                 4,150
Mutual Funds Investment per annum               49,800
No of years covered under insurance and investment                      30
Total Investment Amount           14,94,000
Sum assured under this policy           10,00,000
Amount received if you survive
Term Insurance                      –
Mutual Funds Investment        3,46,16,398

The Rate of Return, in this case, is 15%

Comparison between the  2 cases are as under:

Wealth Cafe actionable – This article is to give you an idea of how important and cheap term insurance is. Buying endowment plans for your insurance needs could be expensive. However, getting an endowment plan for a low-risk investment option could be considered by you for your investment needs. It is important to know the exact return % you are getting from these investments and then, take a decision.


Why you should avoid investing all your money in a FIXED DEPOSIT?

First job – first income – first savings – first investment is always a fixed deposit. The moment there is any lump sum savings in our bank account, we make a fixed deposit.

Recurring deposits are also a type of fixed deposits where a fixed amount is invested monthly in the deposit account.

Most either invested in a fixed deposit or a recurring deposit once in our lifetime. Fixed Deposit is the stepping stone to our investment journey.

Fixed Deposit is a low risk – low return investment product.

Return: A fixed deposit currently gives a return of 7%-7.5% before tax and after taking into an account the tax rate of 30% on the income from fixed deposit. It would be anything between 5.75% – 6%.  Hence, the return from a fixed deposit is not a lot.

Risk: Investors assume that Fixed Deposit is the safest investment option and nothing can go wrong with them. It is important to note that a small amount of risk is always associated with every investment. The RBI ensures a balance of Rs. 1 lakh per account holder in case of default by any scheduled bank. Anything more than that in any bank is not insured and hence, is at risk, if the bank was to shut down. So, if you have a deposit of 5 lakh rupees with a scheduled bank and it was to go bust, RBI will only pay you back 1 lakh rupees. Also, it is important to know that the banks are governed by RBI and the big banks will not just shut down tomorrow, there is a relative risk which we all bear when we take a fixed deposit.

Co-operative Banks: Co-operative banks are not scheduled banks. They generally give a return of 1% or 2% more than the other private/public banks making a fixed deposit with these banks a  very lucrative investment option. However, a higher return means higher risk. Co-operative banks are notoriously known for shutting down without any prior notice and the government may not come to rescue these banks. So, the amount of risk that you take for 1% extra return is not justifiable and it is not a MEASURE RISK and hence, you should try and avoid the same.

Why do you invest?

  1. You can own what you cannot own today
  2. You can own more than what you want to own today but cannot.

Basically, your investments should beat inflation. Because with time, things keep getting more expensive at the rate of inflation, so your money today has to grow at a rate higher than the inflation rate for you to be able to afford what you cannot afford today.

The current rate of inflation is 5% – 5.5% and hence, your investments must fetch you more than this to help you get whatever that you want to own.

Are your fixed deposits giving you a return higher than the inflation rate?

We have tabulated below to explain how your money grows in a fixed deposit versus in a mutual fund. This growth in money is compared to the price of movie tickets and how the same has grown expensive over a period of time.

In this table, you can see the difference in the price of a movie ticket, 10 years ago and today. The same is compared to the growth in your fixed deposit investment @current rate of 6%.

Whereas, if you invest in mutual funds, your money would grow @15% and after 10 years, you will have 4 times the value and in 20 years, 10 times the value you get from a fixed deposit.

You should just not invest your money, but you should invest it right to get more than what you can today.

If you can 10 years from today exactly what you can today, what is the point of investing. This is what fixed deposit does to your money. It does not make it work hard enough for you to be able to enjoy life. By investing in a fixed deposit, you will only be able to own what you have today, tomorrow, not really a lot more.

Wealth Cafe Actionable – Invest in fixed deposit when you are closer to your goal and cannot afford to take a risk. You can also invest for your emergency fund in a fixed deposit as the returns are similar to a liquid fund but fixed deposits are safer. The only problem with fixed deposits is that they are illiquid and you have to bear a penalty for premature withdrawal of a fixed deposit.



How to take that early retirement and achieve financial freedom?

Gone are those days when people were retiring at the age of 60-65 after working for 40 years in the same company. Today we want to work on our own terms. We want to travel, explore, have our own business or not. Most of us are not looking for stability but for growth and excitement. This is considered as a lack of loyalty by a few of the baby boomers, but, we millennials believe in making the most of the opportunities and get maximum returns. We are looking for ways in which we can connect with various people, share our resources and become bigger – faster.

We are able to achieve all of this as we are able to gain from the changes in the business environment, fair trade, and opportunities through social media.  Exchange of ideas and opportunities are just a message away. We don’t even have to type long emails explaining what we do, just a tweet will do it for us.

Hence, most of us don’t want to be a part of a boring monotonous 9 to 5 job but explore more options and work on them. In spite of all of this, we too desire to have financial stability and freedom financially to be able to get what we want to do.

Through this article and working, you will find a path for retirement:

  • The total amount you need to retire/financially free
  • Monthly investments that you will have to make to achieve the retirement amount.
  • Investment options are available to achieve the same.

Regular goal based investing gives you the choice to do what you want to do with life, rather than continue to do what you should do.

How to compute the amount you need for retiring at an age of your choice?

We have attached an excel in this article with the pre-set formula which will help you to compute the amount of your choice. Please note the following points before going ahead:

  • Be able to compute your amount, you will have to edit the columns, which are highlighted in ‘blue’.
  • The explanation to each number is written in wealth cafe notes
  • There could be some specific requirements which are peculiar to you, you can email us about the same
  • this table is a general example of computing your way to financial freedom.

Before doing that, we have described the working of the table to help you understand this better.

Table 1 – How much would you need to spend after you retire based on your expenses today.

Table 2 – What is the total corpus (amount) you need to retire.

Table 3 – How much you should start saving today in order to achieve your amount in Table 2.

Ways to Invest to achieve your retirement corpus.

The monthly contribution amount that you have computed from table 3 can be invested in the following ways.

  1. Employee Provident Fund/ Public Provident Fund –  Monthly contributions to EPF from your salary (where you are employed), and PPF (where you are not employed) should be made for your early retirement goal. EPF/PPF are long term debt investments which give a tax-free; risk-free return of 12% on average after considering the tax benefit. These investments are made to the government of India and are considered as one of the best debt products. All these factors give makes them a good and safe option for retirement investing.
  2. Equity Mutual Funds – Equity Mutual funds are HR-HR (High Risk – High Return) rated financial products. The only way to beat the high risk associated with these investments is to stay invested for a long period of time (i.e. above 10 years). Given that retirement is a long term goal (20 years and above), equity investments is a good option with good returns.            Where you are investing in equity – which is an HR – HR  product, it is important to know that there is a risk which can be triggered when you reach closer to your retirement. To manage this risk, it is important that you should transfer funds from your equity investments to safer debt investment options, a few years before you reach your goal.

For example: when you are 4 years away from your retirement,  there is a possibility of a change in the market and hence, you must transfer your funds from the equity funds to debt funds. This will avoid any major last minute changes in your retirement fund. It is important to take some expert advice at that point to know how much, when and where you should transfer your funds at that time.

Investing to be financially free is the most important personal goal and only discipline and regular investing will help you achieve the same.

You must review your investments, requirements and the entire working in the excel sheet at least annually so that if there are any changes in your investments

Wealth Café  advice – Primarily, you should keep your contribution towards EPF and PPF for your retirement as they are tax-free, risk-free. They are designed to be a retirement investment and hence, are tax-free and have a long term lock-in period. When these contributions are not enough, then you can look at equity mutual fund as an option for your retirement.


Sukanya Samriddhi Scheme – points to note

Sukanya Samridhi scheme was launched in January 2015 to encourage savings for a girl child’s education. Till November 2017 more than 1.26 crore accounts have been opened across the country in the name of the girl child, securing an amount of Rs 19,183 crore.

Here are things to know about Sukanya Samriddhi account:

1) Under the new rules, known as Sukanya Samriddhi Account (Amendment) Rules, 2018, the minimum amount required for opening a Sukanya Samriddhi account has been brought down to Rs 250, from Rs 1,000 earlier.

2) The minimum annual deposit requirement, or the minimum amount required to be deposited in Sukanya Samriddhi account every year, has also been lowered to Rs 250, from Rs 1,000 earlier. These new rules came into effect from July 6, 2018.

3) The interest rate on Sukanya Samriddhi account is revised every quarter, like other small savings instrument such as public provident fund (PPF), and Senior Citizen Savings Scheme (SCSS). Currently, Sukanya Samriddhi account fetches an interest of 8.1% per annum, compounded yearly.

4) Tax exemption is also one of the greatest advantages of the Sukanya Samriddhi account.

5) Deposits in a Sukanya Samriddhi account may be made until the completion of 15 years, from the date of opening of the account. For example, if an account was opened on 10 April 2016, deposits can be made up to 9 April 2031. After this period the account will only earn interest as per applicable rates.

6) Contribution in to Sukanya Samriddhi account up to Rs. 1.50 lakh in a financial year qualifies for income tax deduction under Section 80C of Income Tax Act. The entire interest earned and maturity amount is also non-taxable. The maximum amount that can be deposited in a Sukanya Samriddhi account is Rs 1.5 lakh in a financial year.

7) Sukanya Samriddhi account will mature on completion of 21 years from the date of opening of the account.

8) A Sukanya Samriddhi account can be opened up to age of 10 years only from the date of birth of the girl child. A guardian can open only one Sukanya Samriddhi account in the name of one girl child and maximum of two accounts in the name of two different girl children in post offices and designated banks.

9) Partial withdrawal will be allowed on the account holder attaining the age of 18 to meet educational or marriage expenses. Withdrawal will be limited to 50% of the balance standing at the end of the preceding financial year.

10) Normal premature closure will be allowed for the purpose of the account holder’s marriage if she has attained the age of 18.


Impact of Compounding – Why should you start your SIP now.

Compounding is also one of the reasons why you must invest as early in your life as possible, even if the amount that you are planning to invest is small.

SIP (Systematic Investment Plan) is the best way to achieve the same too.

My father was very keen on us starting to invest with our first income and so I started investing Rs. 5,000 per annum at the age of 25 and continued to invest till I was 30.  I was investing this money for a long term horizon. Majorly for my retirement, so I have decided that I shall not touch the money until I retire i.e. at the age of 65. Given that I have invested in equity mutual funds where the expected return is generally 15%.

I should make approximately 45 lakhs at the end of retirement.

Whereas, My friend Priya did not start investing until she was 31. but she continued to invest till she retired at the age of 65. Again she was looking at 30 years of investments and invested in equity mutual funds, earning 15% return.

Priya will also make 44 lakhs at the end of the retirement.

At the time of retirement, both of us will make approximately 45 lakhs. However, whose method of investing is better?

In the above case,

I have invested only Rs. 25,000 (Rs. 5,000 per annum for 5 years)  and Priya has invested Rs. 1.75 lakhs (Rs. 5,000 for 35 years)

Isn’t it obvious that my method of investing is far better than that of Priya?

Priya had to invest seven times the amount I had invested, just for starting five years later than me.

Even then, Priya earns a lakh lesser than me.

Tabular representation

SIP amount             5,000                5,000
Start Age2531
Invested Till3065
Maturity DateAt age 65At age 65
Maturity Amount45 Lakhs44 Lakhs
Total Amount Invested          25,000          1,75,000
Invested for 5 years 35 years

Amazing isn’t it?

That is the power of compounding taking effect for the investor who started early.

And this is why you should start your SIP at the earliest. If you keep waiting to develop enough money or grow older, you will miss out on your opportunities.


Annualised Return and CAGR

Annualized return and CAGR are not technically the same thing. They refer to the returns on various investment options computed on per annum basis. All long term investments multiply by your wealth by compounding.

Where investment has grown at different rates over a few years, CAGR is the formula used to define the number at which the investment has grown year on year.

Compounded Annual Growth Rate (CAGR) shows how much a person’s investment grew in one year. In other words, it is the average returns an investor earns on his investments after one year. The bank or the financial institution calculates this rate in terms of annual percentage.

How to calculate CAGR?

To calculate CAGR, you must know the following:

  1. The investment made in the initial year (the year of investment)
  2. Amount invested in the current year and
  3. Tenure of investments

CAGR = [(End value/beginning value)^(1/year)] – 1


For example, you bought a stock for ₹100 in 2015. It appreciated by 25% to ₹125 in the year 2016 and further appreciated to ₹150 in the year 2017. Therefore, the appreciation in the rate from 2015 to 2017 was 20%.

If you want to know the growth rate of your investments for the complete period of time, use CAGR. If we put the above values in the formula, Compound Annual Growth Rate for your investment between 2015 and 2017 will be 14.47%.

Mutual Funds/Equity and CAGR

Return on any investment is discussed in terms of CAGR. Especially, in case of equity and mutual fund investments. When you invest in mutual funds, the return that is shown in CAS statements and your Dmat statements are in CAGR.

This is because the actual return % on mutual funds is dependent on the movement in the stock market which keeps changing. It never grows or falls at a fixed rate.

Hence, it could be possible that an investment in mutual fund grew at the rate of 20% in year 1, 30% in year 2, 10% in year 3. In such a case, it becomes very difficult to discuss the actual gains. This is when and why CAGR is used in market-related variable returns investments.

In our Article, how to set goals, we have discussed the expected returns on various asset classes, we are always talking about CAGR.

Wealth Cafe Note:

  1. CAGR is an average rate. Hence, if a CAGR is of 15% of an investment made for 4 years. It could be possible that the first 3 years have 30% gains and the next 2 years lower gains.
  2. The gains are not distributed evenly over the period of investments. One must stay invested for the right time based on the asset class to benefit the most.
  3. CAGR is different from absolute returns and year-on-year gains.
  4. There is a chance that two investments may reflect the same CAGR, with one being more lucrative than the other. This could be because the growth was faster in the initial year for one, while the growth happened in the last year for the other.


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