The Compound Annual Growth Rate (CAGR) measures the annual growth rate of an investment over a specific period, assuming profits are reinvested yearly. It’s a key metric for evaluating how investments like mutual funds, stocks, or portfolios perform over time.
CAGR uses a straightforward formula to show annualized growth:
CAGR = (Ending Value / Beginning Value)^(1 / Years) - 1
Where:
Ending Value is the final investment value,
Beginning Value is the initial investment amount, and
Years is the total investment duration.
Offers a consistent way to measure returns across investments.
Easily compare performance of different investments over varying timeframes.
Smooths out market ups and downs for a clearer picture.
Ideal for assessing multi-year performance of stocks or funds.
Helps forecast future growth and set achievable goals.
Imagine investing ₹100,000, which grows to ₹200,000 in 5 years. Here’s the CAGR:
CAGR = (200,000 / 100,000)^(1/5) - 1 = 2^(0.2) - 1 ≈ 14.87%
This shows your investment grew at an average rate of 14.87% annually over 5 years.