What is CAGR?
CAGR stands for compound annual growth rate. It’s the single yearly rate that would take an investment from its starting value to its ending value over a period, if it grew at the same pace every year.
Real investments don’t grow smoothly: a fund might rise 25% one year and fall 8% the next. CAGR smooths that into one number, which makes it easy to compare investments, funds and asset classes over different periods.
How to use this CAGR calculator
- Starting value: what you invested, or the value at the start of the period.
- Value now: the value at the end of the period.
- Years held: how long, in years. Half years are fine.
The CAGR formula
CAGR = (Ending value ÷ Starting value)^(1 ÷ n) − 1
where n is the number of years.
A worked example
You invested ₹1,00,000 and it’s worth ₹2,50,000 after 7 years:
- CAGR: about 13.99% a year
- Absolute return: 150%
- Your money multiplied 2.5 times
An absolute return of 150% sounds bigger than 14% a year, but they describe the same result. CAGR is the fairer way to compare it with, say, a 7% FD.
CAGR, absolute return and XIRR
| Measure | What it tells you | Use it for |
|---|---|---|
| Absolute return | Total growth over the period | Short periods, under a year |
| CAGR | Average yearly growth, compounded | A single investment held for a few years |
| XIRR | Yearly return accounting for every cash flow | SIPs and investments with many deposits or withdrawals |
Using CAGR wisely
- Compare like with like. Look at the same period for every fund you compare, and against its benchmark.
- Mind the start and end dates. CAGR can look very different depending on whether the period starts at a market high or low.
- Subtract inflation. A 10% CAGR with 6% inflation is roughly 4% of real growth. The inflation calculator helps here.
- Past returns are not a promise. CAGR describes what happened, not what will.
To see what a rate could do going forward, try the lumpsum calculator or the SIP calculator.
