Learn to properly evaluate mutual fund returns using CAGR. Understand rolling returns, benchmark comparison, risk-adjusted returns, and common mistakes in fund evaluation.
"This fund gave 25% last year!" Sounds impressive, but is it actually good? Single-year returns can be misleading. CAGR and proper analysis tell the real story.
Understanding how to evaluate fund performance helps you make better investment decisions.
Why CAGR Matters for Fund Evaluation
The Problem with Point-to-Point Returns
| Year |
Fund A Return |
Fund B Return |
| Year 1 |
+40% |
+15% |
| Year 2 |
-20% |
+10% |
| Year 3 |
+30% |
+12% |
| Year 4 |
-10% |
+8% |
| Year 5 |
+25% |
+15% |
| Total |
+65% |
+76% |
| CAGR |
10.5% |
11.9% |
Fund B with steady returns beats Fund A despite less exciting numbers.
Calculate CAGR: Use our CAGR Calculator.
What CAGR Shows
| Metric |
What It Tells You |
| 1-year return |
Recent performance (can be misleading) |
| 3-year CAGR |
Short-term trend |
| 5-year CAGR |
Medium-term performance |
| 10-year CAGR |
Long-term consistency |
| Since inception |
Overall track record |
The Right Way to Look at CAGR
Step 1: Check Multiple Time Periods
| Period |
Why It Matters |
| 1 year |
Recent trend, but too short |
| 3 years |
Captures at least one cycle |
| 5 years |
Meaningful pattern |
| 7 years |
One full market cycle |
| 10 years |
Long-term capability |
Good fund: Consistent across multiple periods.
Suspect fund: Great in one period, poor in others.
Step 2: Compare to Benchmark
| Fund Category |
Benchmark |
| Large-cap |
Nifty 50 |
| Mid-cap |
Nifty Midcap 150 |
| Small-cap |
Nifty Smallcap 250 |
| Flexi-cap |
Nifty 500 |
| ELSS |
Nifty 500 |
| Debt |
CRISIL Composite Bond |
Fund should beat benchmark consistently to justify active management fees.
Step 3: Compare to Category Average
| Performance |
Assessment |
| Top quartile |
Excellent |
| 2nd quartile |
Good |
| 3rd quartile |
Average |
| Bottom quartile |
Poor |
Target: Top 25% of category consistently.
Rolling Returns: Better Than Point-to-Point
What Are Rolling Returns?
Rolling returns calculate CAGR for every possible period of a given length.
Example: 3-year rolling returns
- Jan 2018 - Jan 2021
- Feb 2018 - Feb 2021
- Mar 2018 - Mar 2021
- ... and so on
Why Rolling Returns Matter
| Advantage |
Explanation |
| Removes timing luck |
Not dependent on start/end date |
| Shows consistency |
Range of returns over time |
| Better comparison |
Fair across funds |
Evaluating Rolling Returns
| Metric |
Good Fund |
Average Fund |
Poor Fund |
| Average rolling return |
> Category + 2% |
= Category |
< Category |
| Consistency |
Low variance |
Moderate |
High variance |
| Worst rolling return |
> Benchmark |
Close to benchmark |
< Benchmark |
Example: 5-Year Rolling Return Analysis
| Fund |
Average |
Best |
Worst |
% Positive |
| Fund A |
14.2% |
22% |
5% |
100% |
| Fund B |
15.1% |
28% |
-3% |
92% |
| Benchmark |
11.5% |
18% |
1% |
98% |
Fund A is more consistent despite slightly lower average.
Risk-Adjusted Returns
CAGR Alone Isn't Enough
| Fund |
CAGR |
Volatility |
Max Drawdown |
| Fund A |
15% |
18% |
-35% |
| Fund B |
13% |
12% |
-20% |
Fund B may be better for risk-adjusted performance.
Key Risk Metrics
| Metric |
What It Measures |
Good Score |
| Sharpe Ratio |
Return per unit of risk |
> 1.0 |
| Sortino Ratio |
Return per unit of downside |
> 1.5 |
| Alpha |
Excess return over benchmark |
> 0 |
| Beta |
Volatility vs market |
Depends on goal |
| Max Drawdown |
Worst peak-to-trough |
Lower is better |
Sharpe Ratio Interpretation
| Sharpe Ratio |
Assessment |
| > 1.5 |
Excellent |
| 1.0 - 1.5 |
Good |
| 0.5 - 1.0 |
Average |
| < 0.5 |
Poor |
CAGR by Fund Category
Expected CAGR Ranges (Long-Term)
| Category |
Expected 10-Year CAGR |
Risk Level |
| Large-cap |
10-12% |
Moderate |
| Flexi-cap |
11-14% |
Moderate-High |
| Mid-cap |
12-16% |
High |
| Small-cap |
12-18% |
Very High |
| ELSS |
11-14% |
Moderate-High |
| Balanced/Hybrid |
8-11% |
Moderate |
| Debt (short-term) |
6-8% |
Low |
| Debt (long-term) |
7-9% |
Low-Moderate |
Minimum Acceptable CAGR
| Category |
Minimum to Consider |
| Large-cap |
Nifty 50 CAGR |
| Mid-cap |
Nifty Midcap + 2% |
| Small-cap |
Nifty Smallcap + 3% |
| Hybrid |
Fixed deposit + 3% |
Red Flags in Fund Evaluation
Warning Signs
| Red Flag |
What It Suggests |
| Great 1-year, poor 3-year |
Lucky timing |
| Top 10% recently, bottom 50% long-term |
Style rotation, not skill |
| Much higher CAGR than category |
Too much risk |
| High CAGR, high drawdowns |
Volatile, may not sustain |
| Recent fund manager change |
Past returns irrelevant |
When to Be Skeptical
| Claim |
Reality Check |
| "35% return last year!" |
What about 3-5 year CAGR? |
| "Beat benchmark by 10%!" |
Is it consistent or one-time? |
| "Best in category!" |
For which period? |
| "No negative years!" |
Did they take enough risk? |
Practical Fund Evaluation Process
Step-by-Step Checklist
| Step |
Action |
Tool |
| 1 |
Check 5-year and 10-year CAGR |
Fund factsheet |
| 2 |
Compare to benchmark |
Same factsheet |
| 3 |
Check category ranking |
Value Research/Morningstar |
| 4 |
Look at rolling returns |
VR Premium/AMC site |
| 5 |
Check risk metrics |
Fund factsheet |
| 6 |
Verify fund manager tenure |
AMC website |
| 7 |
Check expense ratio |
Factsheet |
Sample Evaluation
Fund: XYZ Flexi-cap Fund
| Criteria |
Data |
Assessment |
| 5-year CAGR |
14.2% |
Good (Nifty 500: 12%) |
| 10-year CAGR |
13.1% |
Good (Nifty 500: 11.5%) |
| Category rank (5Y) |
Top 25% |
Excellent |
| Sharpe ratio |
1.1 |
Good |
| Manager tenure |
8 years |
Excellent |
| Expense ratio |
1.8% |
Average (consider direct) |
Verdict: Worth considering for flexi-cap allocation.
Comparing Two Funds Using CAGR
Example Comparison
| Metric |
Fund A |
Fund B |
Winner |
| 3-year CAGR |
18% |
15% |
Fund A |
| 5-year CAGR |
14% |
14.5% |
Fund B |
| 10-year CAGR |
12% |
13.5% |
Fund B |
| vs Benchmark (5Y) |
+2% |
+2.5% |
Fund B |
| Sharpe Ratio |
0.9 |
1.1 |
Fund B |
| Max Drawdown |
-32% |
-25% |
Fund B |
| Expense Ratio |
2.1% |
1.5% |
Fund B |
Conclusion: Fund B wins on consistency, risk-adjusted returns, and cost.
CAGR Limitations to Remember
What CAGR Doesn't Tell You
| Limitation |
Why It Matters |
| Path taken |
Same CAGR, very different journeys |
| Timing of returns |
Sequence matters for withdrawals |
| Risk taken |
High CAGR might mean high risk |
| Future performance |
Past CAGR ≠ future CAGR |
Complementary Metrics
| Use |
With |
For |
| CAGR |
Standard deviation |
Risk-adjusted view |
| CAGR |
Rolling returns |
Consistency |
| CAGR |
Benchmark CAGR |
Relative performance |
| CAGR |
Category average |
Peer comparison |
Conclusion
| Evaluation Step |
What to Look For |
| Time periods |
Consistent across 3, 5, 7, 10 years |
| Benchmark |
Beat benchmark in most periods |
| Category |
Top 25-50% consistently |
| Risk-adjusted |
Sharpe ratio > 1.0 |
| Rolling returns |
Positive, low variance |
| Red flags |
Recent outperformance only |
Key takeaways:
- Never judge a fund by 1-year return alone
- Look at 5-year and 10-year CAGR minimum
- Compare to benchmark and category average
- Use rolling returns for consistency check
- Factor in risk metrics (Sharpe ratio, drawdown)
- Check fund manager tenure and expense ratio
- Past performance doesn't guarantee future returns
Good fund evaluation goes beyond headline CAGR numbers. Look deeper, compare fairly, and invest with realistic expectations.
Calculate fund returns: Use our CAGR Calculator and SIP Calculator to evaluate your investments.
