Suppose you invest Rs. 100 into equities at the beginning of year 1 and the investment grows to Rs. 150 at the end of year 3. The investment has therefore earned you a return of Rs. 50 over the period of 3 years.
Your return on investment over the period of 3 years can be computed as follows:
The ending value of investment (Rs 150) less the sum initially invested (Rs. 100), divided by initial investment (Rs. 100) and multiplied by 100.
= ((150 – 100) / 100) * 100
In other words your portfolio value has grown by 50% over the 3 year period.
Compounded Annual Growth Rate
Now, if you wish to find out the annual returns (compounded) your investment generated, the GAGR would come in handy.
Compounded annual growth rate can be calculated as follows