Imagine you are shopping for a vintage painting at a bustling art market. You find the painting you are looking for and the vendor informs you of its value claiming it appreciates 20% annually. Interesting, right? Before you seal the deal, won’t you try to figure out just how much it has appreciated compared to when it was first made?

I know it’s improbable but just for the sake of improving our knowledge as an aspiring investor, let’s understand the two concepts, Absolute Returns and CAGR, in simple terms. 

Think of Absolute Returns as the straightforward journey of your investment’s performance. It simply tells you the total gain or loss over a specific period. Just like the difference between the price you paid for the painting and its current value. Let’s say you paid Rs. 10,000 for it, and now it’s worth Rs. 12,000. Your Absolute Return is positive Rs. 2,000 or a 20% increase. Makes sense?

But remember, Absolute Returns can be deceptive, especially when comparing investments across different timeframes. 

Now, let’s understand CAGR, the Compound Annual Growth Rate. 

CAGR reveals the average annual growth rate of your investment throughout your investment period. 

Let’s compare two investments, X and Y.

Both boast a 20% Absolute Return. X achieved it in 1 year, while B took 5 years. CAGR reveals that X grew at a faster rate (20% annually) compared to Y’s 4% annual growth (CAGR). This comparison helps you avoid being misled by seemingly impressive but misleading figures. 

CAGR incorporates the time value of money into the equation. Let’s understand that Rs. 2,000 earned in 1 year is different from Rs. 2,000 earned in 5 years due to compounding’s effect. This subtle difference in calculation is crucial for long-term investment decisions. 

Absolute Returns: Consider this for short-term investments or when you need a simple snapshot of your gain/loss.

CAGR: For long-term comparisons, consider CAGR to understand the true annualized growth potential of your investment. 

 Always bear in mind that there are other crucial factors like risk, volatility, and your individual investment goals before making any decisions. Remember, both CAGR and Absolute Returns are just calculations, not guarantees of future performance. 

Therefor, selecting the right investment instrument is imperative. 

A word of caution - the next time you encounter an investment opportunity boasting impressive returns, remember to ask about the Absolute Returns and drive deeper to uncover the CAGR. 

 It’s best to seek professional advice and educate yourself personally to become a savvy investor. After all, knowledge is power! 

Innovage Investment Advisers Private Limited

Registered address: A 703/704, Eureka Towers, Mind Space, Malad (West), Mumbai - 400064. 

SEBI registered Investment Adviser having registration no. INA 000003809 (Valid from 13th Nov 2015 - Perpetual). AMFI Distributor Number: ARN No. 87155. (IRDAI) registration no. CA0339

Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.

Registration granted by SEBI, membership of BASL and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.