CAGR in Simple Words
CAGR (Compound Annual Growth Rate) is the average annual growth rate of an investment over a period, assuming profits are reinvested each year. It tells you the smooth annual return that would produce your final value from your initial investment.
For example, if ₹1,00,000 grows to ₹2,00,000 in 5 years, the CAGR is about 14.87% — meaning the investment grew at roughly 14.87% every year, compounded.
The CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) − 1. The result is expressed as a percentage.
Using the example above: (2,00,000 / 1,00,000)^(1/5) − 1 = 2^0.2 − 1 ≈ 0.1487, or 14.87%. You can also use our CAGR calculator to get this instantly for any investment.
Why CAGR Matters
CAGR is the standard way to compare investments of different sizes and durations. Mutual funds, stocks, and even your FD returns can all be expressed as CAGR for a fair comparison.
Unlike absolute returns, CAGR accounts for the time value of money. A 100% return in 1 year (100% CAGR) is far better than a 100% return in 10 years (about 7.2% CAGR).
Limitations to Keep in Mind
CAGR assumes smooth, steady growth — real investments fluctuate year to year. A fund with 20% CAGR could have had a −30% year in between.
CAGR also ignores volatility and risk. Two investments with the same CAGR can have very different risk profiles. Always look at volatility alongside CAGR when evaluating equity investments.