NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Risk, Return and Performance of Funds
A debt fund investor buys units at NAV Rs 20 and sells after exactly two years at NAV Rs 24.20, with no income distributed in between. What is the compounded annual growth rate (CAGR)?
The CAGR is 10%. The NAV grew by a factor of 1.21 in two years, and the square root of 1.21 is 1.10, which gives 10% a year. The 10.5% option wrongly averages the 21% absolute return without compounding.
- A10%Correct
- B21%
- C10.5%
- D9.5%
Explanation
Growth multiple = 24.20/20 = 1.21. CAGR = (1.21)^(1/2) - 1 = 1.10 - 1 = 10%. The 21% figure is the absolute return over two years, and 10.5% is the simple average (21/2) which ignores compounding.
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