CAGR
Definition
Compound Annual Growth Rate — the mean annual growth rate of an investment over a specified time period longer than one year. Used to compare performance of different investments on a standardized basis.
Why is CAGR Important?
In the context of wealth creation and investing in India, CAGR is a fundamental concept. Whether you are investing in mutual funds via SIPs, fixed deposits, or retirement schemes like PPF and NPS, this metric helps evaluate potential returns and risks. The power of compounding and market volatility make it essential to track this indicator for any long-term portfolio.
Investors are encouraged to use specific investment calculators to project the future value of their corpus. Understanding this term enables better asset allocation, inflation protection, and consistent progress toward your ultimate financial goals.
What is CAGR?
Compound Annual Growth Rate (CAGR) is the annualized rate of return for an investment over a specified period, assuming profits are reinvested. It smooths out the volatility of year-to-year returns and gives a single growth rate.
CAGR Formula
CAGR = (Ending Value / Beginning Value)(1/n) − 1
Example
| Detail | Value |
|---|---|
| Initial Investment | ₹1,00,000 |
| Value after 5 years | ₹1,80,000 |
| CAGR | (1,80,000/1,00,000)^(1/5) − 1 = 12.47% |
CAGR vs. Absolute Returns
| Metric | Use Case | Limitation |
|---|---|---|
| CAGR | Annualized comparison across different periods | Doesn't show volatility |
| Absolute Return | Total gain/loss | Doesn't account for time |
| XIRR | When multiple cash flows (SIPs) | More complex to calculate |