When it comes to evaluating investment returns, the Compound Growth Rate Calculator is a widely used tool. It simplifies complex returns into a single annual growth rate, helping investors understand how their money has grown over time. However, when applied to SIP (Systematic Investment Plan) investments, the reliability of CAGR becomes a bit tricky—especially when compared to lump sum investments like a listed IPO.
What is a CAGR Calculator?
A Compound Growth Rate Calculator measures the average annual growth of an investment assuming compounding and a steady rate of return. It’s most accurate when used for a single investment made at the beginning of the time period and held without any additions or withdrawals.
Why SIP Returns Are Different
In SIPs, investors put in a fixed amount every month over a period. Since these investments are made at different times, each installment grows for a different duration. A ₹5,000 investment made 5 years ago has compounded longer than the ₹5,000 invested last month. This staggered nature makes CAGR less accurate because it assumes a single lump sum investment.
How It Can Mislead
Using a CAGR calculator for SIP investments might show a lower or higher return than the actual performance. For instance, if the markets were volatile during your SIP tenure, CAGR might not capture the effect of rupee cost averaging, which is a major benefit of SIPs.
What Works Better for SIPs?
To measure SIP performance accurately, metrics like XIRR (Extended Internal Rate of Return) are more reliable. XIRR takes into account each SIP installment and calculates a more precise return. While a Compound Growth Rate Calculator can offer a broad idea, it doesn’t tell the full story.
CAGR vs Listed IPO Returns
For a listed IPO, CAGR works well because the investment is typically a one-time event. You invest during the IPO and calculate returns based on its growth over time. Since there are no staggered investments, CAGR gives a cleaner and more accurate picture.
When to Use CAGR for SIPs
Despite its limitations, CAGR can be used for SIPs if:
- You want a basic snapshot of how your portfolio has grown.
- The investments have been consolidated into a lump sum and you’re looking at the return from that point onward.
- You’re comparing final corpus value with initial total invested capital over time.
Conclusion
While the Compound Growth Rate Calculator is a helpful tool, it’s not the most reliable method for evaluating SIP investments due to the periodic and staggered nature of contributions. For SIPs, using XIRR will give you a better picture of your real returns. Use CAGR for simple comparisons or single-investment evaluations like those in listed IPOs, but for SIPs, dig deeper to truly understand your performance.
