Interpretation of Annualised return

General
1

RETURNS (NAV as on 08th April, 2022)

Period Invested for ₹10000 Invested on Latest Value Absolute Returns Annualised Returns Category Avg Rank within Category
1 Week 01-Apr-22 10065.30 0.65% - 0.71% 146/146
1 Month 08-Mar-22 11106.30 11.06% - 7.64% 110/139
3 Month 07-Jan-22 10004.20 0.04% - 0.02% 109/137
6 Month 08-Oct-21 9977.30 -0.23% - -0.27% 86/128
YTD 31-Dec-21 10268.40 2.68% - 1.43% 109/137
1 Year 08-Apr-21 12085.20 20.85% 20.85% 16.99% 69/120
2 Year 08-Apr-20 20725.70 107.26% 43.96% 36.12% 71/101
3 Year 08-Apr-19 15792.30 57.92% 16.44% 13.87% 36/89
5 Year 07-Apr-17 20440.90 104.41% 15.35% 11.27% 29/74
Since Inception 22-Jul-15 22196.50 121.97% 12.60% 11.55% 80/124

The above is the data provided by SBI ETF Nifty 50.

My confusion is as follows:-

  1. 1 year returns is very clear.
  2. 2 year returns under annualized returns says 43.96%. What does this really represent. Does it mean, this ETF generated 43.96% each year for the past two years. If so, does the first year return of 20.85% included in the 2 year return.
  3. Return since inception it says 12.60%. Does this mean that since inception, this ETF was generating every year 12.60%.
2

It’s CAGR. So it’s 43.96 percent per year. The return is high because in April 2020 we were around 8k. Since then we have doubled. U can check exact nifty level on that date.

Yes. So take the same interpretation above as well.

3

Thanks for your reply, so I should not interlink these rates, as an Example, when they mention 5 year, it means, this ETF for the last 5 years generated a CAGR of 15.35% each year. 5 years means 5 years into the past from today. Also why do they not mention per annum or is this understood as it is CAGR.
@Jason_Castelino

4

When we talk about annual returns its always understood to be compounded annually unless mentioned otherwise.
Am sure you know cagr stands for compounded annual growth rate. So basically they are the same.

Yes. Thats why they have given date of investment as 7th April 2020.
Just check for nifty level on this date. We can check if we get same CAGR as on today.

5

This is not true. This figure of 15.35% is the solution to the following question:

What is the value of x such that 10000 x (1 + x)^5 = 20440.90 ?

Here:

  • 10000 is the amount of money invested 5 years ago
  • 20440.90 is the current value of the units which were bought using Rs.10000, 5 years ago
  • 5 is the number of years for which these units stayed invested

You can try substituting x = 15.35% = 0.1535 into the above equation; you will find that it is almost satisfied by this value of x. There will be some small rounding error because we truncate the CAGR at the second decimal place.

If you look at the above equation, you will see that it doesn’t say anything at all about something happening every year. It only deals with the start of the period and the end of the period (“5 years later”).

In other words: this CAGR computation is a post-hoc thing; they look at the NAVs at the beginning and the end of the 5 year period, and then come up with a number x that satisfies that compound interest equation.

In some sense, this value of 15.35% is sort of an average. As with nearly all averages, this number does not usually correspond to anything that actually happened [1]. It is just a way of summing up the change in NAV in a way that makes it sensible to compare to fixed-interest instruments like FDs.

[1] In case you don’t believe that most averages don’t correspond to reality in any concrete sense: what do you think would be the average number of children in an Indian household? How many Indian families will have exactly these many children?

1 Like
6

Thank you. Very clear now.