Most investors are obsessed with performance. They rarely venture beyond the numbers. Since that is what a lot of investors want, we have taken an important performance barometer into account to complement the more popular compounded annual growth rate (CAGR) parameter.
By far, the most widely used performance gauge for a mutual fund's performance is the CAGR. This is mainly because mutual funds are bound by Sebi (Securities and Exchange Board of India) guidelines to show performance over 1-year in terms of compounded growth, while performance below 1-year is shown at simple growth rate. So mutual funds and research houses alike tout the CAGR as the best benchmark to evaluate a mutual fund's performance.
In our view, the CAGR needs to be complemented by another equally relevant barometer the calendar year performance of the fund.
By its nature the CAGR gives a reasonable insight into the fund's overall performance. It smoothens the highs and lows and tells you how much return the fund has yielded on an annual compounded basis.
For instance, if a diversified equity fund has a CAGR of 15% since 1999, it means that its growth has compounded annually at 15% over 1999 to 2004.
The problem with such a barometer is that it tends to disguise the bad performance phases and gives a 'holistic' view. It does not highlight the risk and the intermittent volatility. For instance, a lot of discerning investors want to know what a fund has done over 1999 to 2004 bit by bit.
They want to know the fund's performance post-tech crash in 2000. They want to know how the fund fared in the bear phase over 2000-2002 that tested the resolve of the best equity funds. They want an accurate picture, not just a yield.
Calendar Year Growth
| 1999 | 2000 | 2001 | 2002 | 2003 | YTD* | |
| Birla Advantage Fund | 283.7% | -55.6% | -23.7% | 4.1% | 109.6% | -16.3% |
| Sundaram Growth | 107.5% | -26.6% | -15.2% | 15.0% | 51.8% | -9.8% |
| Sensex | 63.6% | -26.1% | -17.5% | 4.0% | 72.2% | -16.1% |
We have addressed this need by highlighting the NAV growth over the calendar year beginning 1999. This gives investors an idea about how exactly the fund has tackled the vagaries of stock markets.
Compounded Annual Growth Rate (CAGR)
| 6-Mth | 1-year | 3-year | 5-year | Inc. | |
| Sundaram Growth | 1.3% | 72.1% | 28.8% | 18.9% | 19.2% |
| Birla Advantage | -5.9% | 57.6% | 22.8% | 16.5% | 20.5% |
For illustration purpose we have taken two funds Birla Advantage Fund and Sundaram Growth Fund. Birla Advantage was a rage during the tech boom in 1999 (283.7% growth in 1999). But the tech slide in 2000 (down 55.6%) hit the fund just as hard and suddenly it didn't look like a super investment anymore.
The fund's 5-year CAGR is 16.5%, which is healthy, but nevertheless masks the turbulence of the tech crash. So a lot of the volatility that does not get reflected in the CAGR is well highlighted by the calendar performance.
On the other hand, lets take Sundaram Growth Fund, the proverbial laggard with a 'staid' performance record. Despite a relatively 'disappointing' 1999 ('only' 107.5%), this so-called laggard was among the better performing funds in 2000 (down just 26.6%) when funds around it were falling like ninepins. It certainly outshone the more 'exciting' Birla Advantage Fund.
Over 5-year, Sundaram Growth (18.9% CAGR) has done better than Birla Advantage (16.5%).
The CAGR figures of Birla Advantage and Sundaram Growth don't really reflect the reality behind the performance of both funds. They don't say how Birla Advantage did well only in the bull run but fared miserably in the bear phase.
They don't say how Sundaram Growth witnessed lower volatility over the years and proved to be a relatively low-risk investment proposition for investors. In other words, while CAGR tells you the story, the calendar performance allows you to read between the lines.
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