What is CAGR? (Compound Annual Growth Rate)
CAGR is the rate at which an investment grows from its initial value to its final value over a specified time period, assuming the profits are reinvested at the end of each year. It smooths out the volatility of annual returns to give a single, meaningful growth rate.
For example, if your investment grew from ₹1 lakh to ₹2.5 lakh in 7 years, the CAGR would be approximately 14.0% — meaning it grew as if it earned exactly 14% every year.
CAGR Formula
CAGR = [ (Final Value / Initial Value)^(1/n) − 1 ] × 100
Where:
n = Number of Years
Example:
Initial = ₹1,00,000 | Final = ₹2,50,000 | n = 7
CAGR = (2.5)^(1/7) − 1 = 14.0%
Where is CAGR Used?
- Mutual Funds: Fund houses advertise 3-year, 5-year, and 10-year CAGR to show performance.
- Stocks: Investors use CAGR to compare stock performance across different periods.
- Business Metrics: Companies report revenue and profit CAGR to showcase growth.
- Goal Planning: Calculate the required CAGR needed to meet a financial goal.
CAGR vs Absolute Return vs XIRR
- Absolute return does not account for the time period; CAGR does.
- CAGR assumes a single investment; XIRR handles irregular, multiple cash flows (SIPs).
- Always compare CAGR of similar time periods when evaluating funds or stocks.
