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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment

Mr. Vikram Shah invests Rs 50,000 in a mutual fund. The value is Rs 60,000 at the end of year 1 and Rs 72,000 at the end of year 2, with no other cash flows. What is the compound annual growth rate (CAGR) over the two years?

The CAGR is 20%. The investment grows from Rs 50,000 to Rs 72,000, a ratio of 1.44, and the square root of 1.44 is 1.2. This matches year-wise growth of 20% each year, confirming the figure, while 22% is a simple average that ignores compounding.

  1. A22%
  2. B20%Correct
  3. C21.9%
  4. D44%

Explanation

CAGR = (72,000/50,000)^(1/2) - 1 = (1.44)^(0.5) - 1 = 1.2 - 1 = 20%. Check: 50,000 x 1.2 = 60,000 and 60,000 x 1.2 = 72,000. The 22% figure is the arithmetic average of 44% over 2 years, which wrongly ignores compounding, and 44% is the total return.

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