The Compound Annual Growth Rate (CAGR) is a key metric used to evaluate the performance of mutual fund schemes over time. Unlike simple returns, which calculate growth linearly, CAGR accounts for compounding, providing a smoothed annualized rate that reflects the true growth trajectory of an investment. This makes it an essential tool for comparing different funds or assessing long-term wealth creation potential.
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CAGR helps investors cut through market volatility and see the consistent annual growth rate of their investments. For example, a fund with a 10% CAGR over 5 years means the investment grew at that steady rate annually, despite short-term ups and downs. This metric is particularly useful for goal-based investing, such as retirement planning or education funds, where predictability matters more than day-to-day fluctuations.
Ultimately, understanding CAGR empowers investors to choose funds aligned with their risk appetite and financial goals.
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