By Irshad Mushtaq
When investing in equities or mutual funds, many are tempted to quickly book profits and exit. However, this mindset can undermine the potential of long-term wealth creation through compounding.
CAGR (Compound Annual Growth Rate)
CAGR is pivotal in understanding investment growth. It’s not just about short-term gains but the US potential for your investment to compound over time. By persistently investing in quality funds and stocks like TCS, your money can grow exponentially.
For instance, consider an initial investment of ₹10 lakhs. Over the years, if this grows at a CAGR of 20%, it could double every 3.8 years (approximately). This means:
– After 3.8 years, ₹10 lakhs becomes ₹20 lakhs.
– After 7.6 years, ₹20 lakhs becomes ₹40 lakhs.
– After 11.4 years, ₹40 lakhs becomes ₹80 lakhs.
– After 15.2 years, ₹80 lakhs becomes ₹160 lakhs, and so forth.
This exemplifies the power of compounding: staying invested in high-quality assets allows significant wealth accumulation over time.
XIRR (Extended Internal Rate of Return)
XIRR is particularly useful when there are multiple investments over different periods. It gives a clear picture of your annualized return considering the actual dates of investments and redemptions. For example, if you invested ₹10 lakhs in varying tranches over several years, XIRR would account for each inflow and outflow, providing a more accurate performance indicator.
Absolute Return
Absolute Return measures the total gain or loss of an investment over a specified period. For example, if you invested ₹10 lakhs and after 5 years, the value is ₹15 lakhs, your absolute return is 50%.
Normal Annual Return
This metric shows the average yearly gain or loss of your investment without compounding effect. For example, if your ₹10 lakh investment grows to ₹15 lakhs in 5 years, the normal annual return would be 10% per annum.
Conclusion
Investing is about patience and allowing your investments to compound over time. Rather than succumbing to the temptation of early profit-booking, focus on maintaining investments in quality funds and equities. Aim for a robust CAGR (15% to 22%) for substantial long-term wealth growth.
In essence, the true wealth from investing stems from letting your assets grow uninterrupted, harnessing the power of compounding. Stay the course, and let CAGR, XIRR, absolute return, and annual return guide your investment decisions for enduring wealth creation.
Understanding CAGR, XIRR, Absolute Return, and Annual Return is crucial for successful investing. Focus on the power of compounding with CAGR, track your annualized returns with XIRR, and evaluate your total gains with Absolute Return. Stay invested for long-term wealth creation!
Learn from the insights of @IrshadMushtag, writer, investor, entrepreneur & Founder of MI Securities! Connect for valuable financial advice at [email protected]
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