What is CAGR? How to Calculate Compound Annual Growth Rate
Learn what CAGR (Compound Annual Growth Rate) means, how to calculate it, and why it matters for investments. Includes formula, examples, and comparison with simple returns.
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What is CAGR?
CAGR (Compound Annual Growth Rate) represents the mean annual growth rate of an investment over a specified time period, assuming profits are reinvested at the end of each year. It is the most common metric used to compare investment performance and business growth. Unlike simple returns, CAGR smooths out the volatility of year-by-year returns to show a consistent annual growth rate.
The CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1/n) – 1. Where n = Number of years. Example: You invested ₹1,00,000 in a mutual fund. After 5 years, it grew to ₹1,76,234. CAGR = (1,76,234 / 1,00,000)^(1/5) – 1 = (1.76234)^0.2 – 1 = 1.12 – 1 = 0.12 = 12% CAGR. This means your investment grew at a compounded rate of 12% per year.
CAGR vs Absolute Return vs Simple Interest
Absolute Return: Total % gain/loss ignoring time. Example: ₹1L → ₹2L = 100% absolute return (but over how long?). Simple Return/CAGR: 100% over 10 years = 7.18% CAGR (much less impressive!). 100% over 3 years = 26% CAGR (much better!). CAGR is always better for comparing investments of different durations.
Where CAGR is Used in Finance
Mutual fund performance: 1-year, 3-year, 5-year CAGR shown in fund fact sheets. Stock market returns: Nifty 50 has delivered ~14-15% CAGR over the last 20 years. Business revenue growth: Companies report revenue CAGR in annual reports. Real estate: Property value CAGR helps compare with other investments. FD vs equity: Comparing 6% FD with 12% equity CAGR over 10 years.
CAGR Limitations
While CAGR is powerful, it has limitations: It assumes smooth, consistent growth (real investments fluctuate). It does not show risk or volatility. Two investments with same CAGR can have very different risk profiles. For volatile investments, also look at Standard Deviation and Sharpe Ratio alongside CAGR.
Calculate CAGR Instantly
Use our free CAGR Calculator to instantly compute the compound annual growth rate of any investment. Just enter your beginning value, ending value, and number of years to get your CAGR percentage.
Frequently Asked Questions
What is a good CAGR for mutual funds in India?▾
For equity mutual funds in India, a CAGR of 12-15% over 5-10 years is considered good. Large-cap funds typically deliver 10-13% CAGR, while mid/small-cap funds can deliver 14-18% CAGR over long periods.
Is higher CAGR always better?▾
Not necessarily. Higher CAGR often comes with higher risk and volatility. A 20% CAGR small-cap fund may have years of -40% returns, while a 12% CAGR large-cap fund is more stable. Consider risk-adjusted returns (Sharpe ratio) alongside CAGR.
What is the difference between CAGR and IRR?▾
CAGR measures growth between two specific points in time (beginning and ending value). IRR (Internal Rate of Return) accounts for irregular cash flows at different time periods. For SIP investments with monthly contributions, IRR (or XIRR in Excel) is more appropriate than CAGR.
How is CAGR different from XIRR?▾
CAGR works for lump sum investments (one beginning value, one ending value). XIRR is used for multiple cash flows at different dates — like monthly SIP investments. When evaluating SIP returns, always use XIRR for accuracy.
Can CAGR be negative?▾
Yes, if the ending value is less than the beginning value, CAGR will be negative. For example, if ₹1 lakh invested in 2020 became ₹80,000 by 2025, CAGR = (80,000/1,00,000)^(1/5) – 1 = -4.3%. This means the investment lost value at 4.3% per year.
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