We often get confused when calculating returns. For example, if your ₹2,000 investment becomes ₹3,000 in 3 years, you might think you’ve made a 50% return, right?
But that’s not the full story. That’s what we call Absolute Return, and it doesn’t show the impact of compounding. If you calculate the CAGR (Compound Annual Growth Rate) for the same period, the return is actually 14.47% per year.
Sounds tricky? Don’t worry — this was my first step into the world of compounding too. In this blog, I’ll explain CAGR vs Absolute Return in simple terms, with real examples.
What is Absolute Returns?
Absolute return is simple way to calculate returns just like we are doing since our childhood, it is calculated in percentage and shows us total gain or loss over a period of time.
Suppose you invested ₹1,00,000 in a mutual fund. After 2 years, it grows to ₹1,30,000.
Absolute Return = (ending value – beginning value)/beginning value
Absolute Return = (130000−100000)/100000(130000 – 100000) / 100000 × 100 = 30%
What is CAGR?
Compound annual growth rate (CAGR), as the name suggest it shows compounding annual growth rate of our investment if it was grown at a steady rate.
Formula to calculate CAGR is
CAGR = (ending value/beginning value)^(1/n) – 1
lets take the same example you invested ₹1,00,000 in a mutual fund. After 2 years, it grows to ₹1,30,000.
CAGR = (130000/100000)1/2−1
=14.02(130000 / 100000)^{1/2} – 1
= 14.02%
When Should You Use Which?
-
Use Absolute Return for short-term investments (e.g., < 1 year).
-
Use CAGR for long-term investments to understand compounded growth.
-
Never compare a 3-year CAGR to a 1-year absolute return — it’s like comparing apples to oranges.
Conclusion – Which Is Better?
Both Absolute Return and CAGR are useful – just in different situations. If you’re looking at long-term wealth-building, CAGR gives a more accurate picture. For short-term gains, absolute return is fine. So, don’t just look at one number – understand what it means.