What is the difference between cumulative return and annualised return CAGR?

Cumulative Return and Annualised Return (also known as Compound Annual Growth Rate or CAGR) are both metrics used to measure an investment's performance over time, but they serve different purposes.

Cumulative Return is the total percentage change in the value of an investment from its starting point to its ending point.

It is calculated as:

Cumulative Return = [(Ending Value - Starting Value) / Starting Value] * 100

It shows an investment's overall profit or loss, regardless of the time it took to achieve it.

Annualised Return (CAGR) is the annual growth rate that an investment would have needed to achieve to reach its ending value from its starting value over a specific period.

It is calculated as:

CAGR = (Ending Value / Starting Value)^(1/Number of years) - 1

Example:

• If you invest ₹100 and it grows to ₹200 in 5 years, the Cumulative Return is 100%.
• The Annualised Return (CAGR) was approximately 14.87%. This means the investment grew at an average rate of 14.87% per year over the 5 years.
• For quick results, use an online CAGR calculator.

When to use which:

• Cumulative Return is useful for understanding the overall performance of an investment.
• Annualised Return is better for understanding investments with different time horizons.