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“This fund gave 60% returns!” “That stock gave 100% returns!” Which one was better? You can’t tell — because the time period is missing. This is why investors use CAGR, the compound annual growth rate.
What CAGR means
CAGR answers one question: if this investment had grown at the same rate every year, what would that rate be?
CAGR = (Ending value ÷ Starting value)1 ÷ years − 1
Example: ₹1,00,000 grows to ₹2,00,000 in 5 years.
CAGR = (2,00,000 ÷ 1,00,000)1/5 − 1 = 20.2 − 1 = 14.87% a year.
The absolute return is 100%, but the money didn't grow 20% a year — compounding means 14.87% a year is enough.
Why absolute returns mislead
Back to our two investments:
| Investment | Total return | Time | CAGR |
|---|---|---|---|
| Fund A | 60% | 3 years | 16.96% |
| Stock B | 100% | 6 years | 12.25% |
Stock B’s 100% sounds better, but Fund A grew faster every year. Over the same six years, Fund A’s rate would have produced more.
Why simple averages mislead too
Imagine an investment that rises 50% one year and falls 50% the next:
- Simple average return: (50% − 50%) ÷ 2 = 0%.
- Reality: ₹100 → ₹150 → ₹75. You lost 25%.
- CAGR: (75 ÷ 100)1/2 − 1 = −13.4% a year.
CAGR tells the truth because it’s built from the actual start and end values.
How to use CAGR
- Compare investments over different periods on an equal footing.
- Compare with benchmarks — a fund’s 5-year CAGR versus its index’s 5-year CAGR over the same dates.
- Plan goals — if you need ₹20 lakh in 10 years and have ₹8 lakh, you need a CAGR of about 9.6%.
- Project the future — what ₹1 lakh becomes at a given CAGR over N years (with the important caveat that returns aren’t guaranteed).
CAGR vs XIRR vs absolute return
| Measure | Best for | Limitation |
|---|---|---|
| Absolute return | Short periods (under a year) | Ignores time |
| CAGR | One lump-sum investment held for a period | Can’t handle multiple deposits or withdrawals |
| XIRR | SIPs, irregular investments and withdrawals | Needs each cash flow’s date |
Don't use CAGR for SIPs. If you invested ₹10,000 every month for 3 years and ended with ₹4.68 lakh, dividing by the total invested and annualising would understate your real return, because most of your money wasn't invested for the full three years. Use XIRR instead.
What CAGR hides
CAGR is a smoothed number. Two investments with the same 12% CAGR could have had very different journeys — one steady, one swinging 30% up and down. Always look at volatility and the worst falls (drawdowns) alongside CAGR, especially if you might need the money at a bad moment.
Calculate CAGR instantly
Our CAGR Calculator takes a starting value, ending value and time in years and months, and shows the CAGR, absolute return and growth multiple. A second section projects a future value at any CAGR — handy for goal planning.
This article is for education only and is not investment advice.
Free toolTry the CAGR CalculatorMeasure the true yearly growth rate of an investment.Frequently asked questions
Can CAGR be negative?
Yes. If the ending value is lower than the starting value, CAGR is negative, showing the average yearly loss.
Is CAGR the same as average annual return?
No. A simple average of yearly returns overstates growth when returns vary. CAGR accounts for compounding and gives the true constant rate.
What is a good CAGR?
It depends on the asset and risk. Compare an investment's CAGR with a suitable benchmark over the same period, such as an index for equity funds.
For education only — not investment advice or a recommendation to buy or sell any security. Trading involves risk of loss. Verify charges and prices with your broker. Written by the Toolsopedia team. Spotted an error? Tell us and we’ll fix it.