POSTED BY January 3, 2013 3:02 pm COMMENTS (9)
ONCould someone help me understanding the logic behind this returns table:
My doubt is, for say if I invest 100rs and by end of 1st year it gives me 134rs. After the 3rd year, will my money go to 108.24? and 5th year – 106? and so on…?
or
1st year – Rs. 134; 3rd year – 144.72 and so on?
What is the benefit of keeping it long term?
As of Date 02/01/2013 | Returns (%) |
---|---|
One Year Return | 34.01 |
Three Year Return | 8.24 |
Five Year Return | 6.10 |
Since Inception | 21.12 |
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compounding simply means if X is the sum in the previous year and r1 is the interest in current year the
the sum in the current year X1 =X(1+r1) (here r1 can be positive or negative)
and for year 2
X2 =X1(1+r2)
and so on.
If r1 =r2 =r3 = r you get the simple formula X(1+r)^n where n is the number of years.
Compound interest does not require r the rate to be constant each year!
So if there is no pattern or in other words nothing is gtd. then where is the concept of compounding coming into picture here in MFs?
Dear Gowtam, i’m trying to answer your query. You are already aware that in case of Eq. markets, the prices can be go up & go down. so for your 100 Rs. invested on 4th jan 2013, this may be a possible situation.
03-01-2014 126 Rs.
03-01-2015 98 Rs.
03-01-2016 88 Rs.
03-01-2017 106 Rs.
03-01-2018 152 Rs.
—
—
—-
—
03-01-2029 275 Rs.
From the above example, you can see yourself, there is no pattern. but in the long term i.e. at least after 10Y or more, you can expect some positive return although these are not gtd. at all.
thanks
Ashal
Thanks MP. Long way to understand things in MF since I am new to invest in MF.
NO that is not what it means.
CAGR is a geometric average
So if after 3 year 100 becomes 108.2 4 the CAGR would be 3%
since is listed as 8.24%
your money would have grown to 126.8 over 3 years
If you had looked after say 1.5 years the value could even be less than 100
the point is equity corpus does not grow steadily there will be fluctuations and CAGR averages them
My doubt is, for say if I invest 100rs and by end of 1st year it gives me 134rs.
After the 3rd year, will my money comes down to 108.24? and 5th year – 106? and so on…?
Sorry I meant:
So 100 rs is the starting value and if you know the value at the end of 3 years CAGR is 8.24% and so on
As the return is compounding in long term it gives a huge return.
These % above one year represent compounded annual growth rate also known as geometric average
CAGR = (ending value ÷starting value)^1/(number of years) – 1
^ means to the power of
So 100 rs is the starting value and if you know the value at the end of 3 years CAGR is ,24 and so on
Long term CAGR returns from the market is about 15% which is well above the inflation rate.
So the if you stay invested in equity for a long time you will be able beat inflation and achieve your financial goals
Use this to calculate CAGR of your SIP and lumpsum instruments
http://freefincal.wordpress.com/mutual-fund-sip-return-calculator/
Use this to calculate CAGR based on historical sensex data
http://freefincal.wordpress.com/sensex-return-simulator/