# Calculation of Returns (CAGR, Post-tax Returns etc.)

30th June 2021

Return on Investment or ROI shows you the return from your investments. It helps you to choose the best investment across different investment options. You may evaluate the investment based on your financial goals and risk tolerance. You could also gauge the cost of your investment and look for hidden charges that could eat up your returns. The return on investment is usually expressed as a percentage. In simple terms, the return on investment is a financial ratio that helps you determine the benefit of your investment against the costs. You may calculate the return on investment using the formula:

ROI = Net Profit / Cost of the investment * 100

Compounded annual growth rate (CAGR) is one of the most commonly used terms in the mutual fund industry. CAGR represents the compounded growth rate of your investments made in mutual funds. It helps you gauge a mutual fund schemeâ€™s average annual growth over a given time period.

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investmentâ€™s life span.

The Compound Annual Growth Rate (CAGR) formula is:

CAGR = (Ending balance/beginning balance)^1/n – 1

Here,

Ending balance is the value of the investment at the end of the investment period

Beginning balance is the value of the investment at the beginning of the investment period

N is the number of years you have invested

Use in Mutual Fund:

Compare returns between different funds and benchmarks. You can also use the CAGR calculator to compare the returns you earn on a particular fund against similar funds. This can help you understand how well the mutual fund is performing compared to its peers. You can also compare against the benchmark indices for greater clarity.

Better investment decisions: The CAGR calculator is a very handy tool to help you analyze your investment decisions every year. For instance, if you have purchased an equity mutual fund five years ago, the CAGR calculator gives you the average rate of returns you have earned every year over the past five years. This can help you understand whether the fund’s returns are as per your expectations or not. If the fund is not performing well, you may want to reconsider your investment in the future.

Post Tax Return

An after-tax return is any profit made on an investment after subtracting the amount due for taxes. Many businesses and high-income investors will use the after-tax return to determine their earnings. An after-tax return may be expressed nominally or as a ratio and can be used to calculate the pretax rate of return.

After-tax returns break down performance data into “real-life” form for individual investors. Those investors in the highest tax bracket use municipals and high-yield stock to increase their after-tax returns. Capital gains from short-term investments due to frequent trading are subject to high tax rates.

Businesses and high tax bracket investors use after-tax returns to determine their profits. For example, say an investor paying taxes in the 30% bracket held a municipal bond that earned \$100 interest. When the investor deducts the \$30 tax due on income from the investment, their actual earnings are only \$70.

High tax bracket investors donâ€™t like it when their profits are bled-off in taxes. Different tax rates for gains and losses tell us that before-tax and after-tax profitability may vary widely for these investors. These investors will forego investments with higher before-tax returns in favor of investments with lower before tax returns if lower applicable tax rates result in higher after-tax returns. For this reason, investors in the highest tax brackets often prefer investments like municipal or corporate bonds or stocks that are taxed at no or lower capital tax rates.

An after-tax return can be expressed nominally as the difference between an investmentâ€™s beginning market value and ending market value plus any dividends, interest, or other income received and minus any costs or taxes paid. After-tax can be represented as the ratio of after-tax return to beginning market value, which measures the value of the investmentâ€™s after-tax profit, relative to its cost.