What is CAGR?
Compound Annual Growth Rate (CAGR) is the smoothed yearly rate at which an investment grows over a specified period, assuming profits are reinvested at the end of each year. It is the single most useful metric to compare long-term performance across different investments, fund managers or asset classes.
Unlike absolute returns, CAGR factors in the time over which the growth occurred. This makes it ideal for comparing a 3-year fund against a 7-year one on equal footing.
CAGR Formula
- Initial Value (PV) — the amount you invested at the start.
- Final Value (FV) — the total worth of the investment at the end.
- N — number of years (can be fractional, e.g., 4.5).
Multiply the result by 100 to express it as a percentage. For an SIP, the calculator instead solves the monthly rate r from the future-value of annuity equation and then annualises it.
Worked Example
You invest ₹1,00,000 in a mutual fund. After 5 years, its value is ₹2,50,000.
= 2.50.2 − 1
= 1.2011 − 1
= 20.11% per year
The same ₹1,50,000 absolute gain (150%) translates to roughly 20.11% CAGR — a more honest representation of yearly performance.
Why use CAGR?
- Compare investments of different durations on a like-for-like basis.
- Filter out short-term volatility and noise.
- Project realistic long-term wealth using a compounding model.
- Benchmark personal portfolios against indices like Nifty 50 or Sensex.
- Evaluate business growth: revenue, users, AUM, or any compounding quantity.
CAGR vs Absolute Returns
| Aspect | Absolute Return | CAGR |
|---|---|---|
| Considers time | No | Yes |
| Useful for comparison | Limited | Highly comparable |
| Accounts for compounding | No | Yes |
| Best for | Short periods | Multi-year investments |