CAGR, or Compound Annual Growth Rate, is one of the most useful metrics for evaluating investment performance. It tells you the annual growth rate of an investment over a specific period, assuming profits are reinvested.

CAGR Formula

CAGR = (Ending Value / Beginning Value)^(1/n) - 1

Where n = number of years

Example

Say you invest ₹1,00,000 and after 5 years it grows to ₹1,50,000.

CAGR = (1,50,000 / 1,00,000)^(1/5) - 1 = (1.5)^0.2 - 1 = 0.0845 or 8.45%

Your investment grew at an average rate of 8.45% per year.

Why CAGR Is Useful

  • It smooths out volatility — shows a single growth rate
  • Easy to compare different investments
  • Accounts for compounding effect
  • Works for any time period

CAGR vs Absolute Return

Absolute return only tells you the total gain (50% in the example above). CAGR tells you the annual growth rate (8.45%). CAGR is more useful because it accounts for the time period.

Limitations

CAGR assumes steady growth, but real markets are volatile. It doesn't show the ups and downs along the way. Always look at year-by-year performance alongside CAGR.

Disclaimer: This article is for educational purposes only.