CAGR Calculator — Compound Annual Growth Rate

What is CAGR?

CAGR stands for Compound Annual Growth Rate. It measures the mean annual growth rate of an investment over a specified time period longer than one year. Unlike simple returns, CAGR smooths out the volatility of year-to-year performance and gives you a single, annualized percentage that tells you how fast your investment grew on average each year.

CAGR is widely used by investors, analysts, and businesses to compare the performance of different investments, mutual funds, stocks, and portfolios. It is particularly useful because it accounts for the compounding effect — the phenomenon where your returns themselves generate further returns over time.

CAGR Formula

The compound annual growth rate is calculated using a straightforward formula:

Where:

• Final Value (FV) = The ending value of the investment
• Initial Value (PV) = The beginning value of the investment
• n = Number of years in the investment period
• The result is multiplied by 100 to express it as a percentage

For example, if you invested Rs 1,00,000 and it grew to Rs 5,00,000 in 5 years, the CAGR would be (5,00,000/1,00,000)^(1/5) - 1 = 37.97%. This means your investment grew at an average annual rate of 37.97% when compounding is considered.

CAGR vs Absolute Returns

Absolute return is the simplest measure of investment performance — it tells you the total percentage gain or loss over the entire holding period. The formula is: ((Final Value - Initial Value) / Initial Value) x 100. While easy to understand, absolute return does not account for time.

For instance, an investment that delivers 100% absolute return sounds impressive, but if it took 15 years, the CAGR is only 4.73%. Conversely, 100% absolute return in 3 years translates to a CAGR of 26%. CAGR is always more meaningful because it normalizes returns across time, allowing you to compare a 3-year investment with a 10-year one on equal footing.

CAGR vs IRR

IRR (Internal Rate of Return) is often confused with CAGR, but they serve different purposes:

• CAGR works with a single initial investment and a single final value — perfect for lumpsum investments
• IRR handles multiple cash flows at different points in time — ideal for SIPs, irregular investments, or business projects
• For a pure lumpsum investment with no additional inflows or outflows, CAGR and IRR will give the same result
• For SIP investments, always use IRR (also called XIRR) as CAGR will underestimate the true return since later installments had less time to grow

When to Use CAGR

• Comparing mutual funds: Evaluate which fund delivered better annualized returns over the same period
• Measuring portfolio performance: Track how your overall portfolio grew on an annualized basis
• Business revenue growth: Companies use CAGR to report consistent growth rates in revenue, profit, or user base
• Setting investment goals: Determine the CAGR needed to reach a target corpus from your current savings
• Real estate appreciation: Calculate the annualized growth of property values over your holding period

Limitations of CAGR

While CAGR is a powerful metric, it has limitations. It assumes a smooth growth path and does not capture the ups and downs an investment actually experienced. Two investments can have the same CAGR but vastly different risk profiles. CAGR also ignores interim cash flows — dividends, additional investments, or partial withdrawals are not factored in. For a more complete picture, consider CAGR alongside metrics like standard deviation, maximum drawdown, and Sharpe ratio.