Calculate absolute and annualized returns
When a Mutual Fund house advertises that a fund has returned "150%", you need to look very closely at the fine print to see how they calculated that number. Are they talking about Absolute Return or Annualized Return (CAGR)?
Absolute return is simply how much money you made relative to your initial deposit, entirely ignoring the time it took to make it.
But did it take 2 years to hit ₹250? Or did it take 20 years? An absolute return of 150% sounds amazing until you realize it took 20 years to achieve, which means it actually performed worse than a standard, risk-free Fixed Deposit.
This is why the financial industry uses Compound Annual Growth Rate (CAGR). It takes that 150% absolute return and asks, "If this had grown at a perfectly steady pace every single year, what would that yearly interest rate be?"
Never evaluate a long-term investment based on Absolute Returns. Always look for the CAGR to compare it fairly against other investments like FDs or Bonds.
If Fund A has an Absolute Return of 100% and Fund B has an Absolute Return of 50%, which fund is the better investment?
