How to Calculate Rate of Return on Investment or Insurance

How to Calculate Rate of Return on Investment or Insurance

Suppose You invested Rs 100 for a period of 5 years and that amount becomes Rs 150. Here Your Total rate of Return is (150-100)/100 or 50%.

Is Rate of Return on Investment Good

Was this a good investment? Total return can't answer that question because it doesn't take into account the time factor (i.e., how long an investment was held). If the investor earned 50% in one year, it is cause for celebration. If, however, it took her twenty years to produce such a return, this would have been a terrible investment.

Compound Annual Growth Rate (CAGR)

To determine is the rate of return on our investment any good what we need to calculate is the CAGR. CAGR provides the annual return for such an investment as if it had grown at a steady, even pace. In other words, it tells you how much you would have to earn each year, compounded on your principal to arrive at the final selling value.

How is Compound Annual Growth Rate (CAGR) Calculated

Most people will divide 50% by time duration i.e 5 years and think 10% is their rate of return but they would be wrong.
CAGR will be =(150/100)^(1/5)-1=0.0844
So your Rate of return  on the above example will be 8.44% Annualized