Annuities and concept of CAGR

An annuity is a sum of money paid at regular periods, such as monthly, quarterly, annually. A common example of an annuity is pension. Annuities can be of two types

(1) Fixed annuity
(2) Flexible annuity

Fixed Annuity means that fixed returns are received at regular periods. For instance, the Senior Citizen Saving Scheme pays 9.3% p.a. on the investment for a predetermined term assured (for example, for the next 5 years).

Floating annuities are those in which the returns are benchmarked to inflation or index returns or any other return as specified in the indenture agreement at the time of buying. So the annuities paid are not fixed, but change in line with the chosen benchmark.

In financial markets, the time value of money is always taken into account. It is assumed that if an investment provides a series of cash inflows, they can be re-invested to earn a positive return. This is exactly what’s recommended by the share market tips providers. Alternatively, an investment that does not have intermediate cash flows, is assumed to grow at an annual rate each year, to be compounded every year to reach the final value.

The compounded annual growth rate (CAGR) of an investment is the underlying compound interest rate that equates the end value of the investment with its beginning value. 24 Carat Financial Services is a research house known for its best equity services and commodity calls.