What is CAGR?
CAGR (Compound Annual Growth Rate) is the rate at which an investment would grow if it grew at the same rate every year, with profits reinvested. It is commonly used to compare the historical performance of investments like mutual funds, stocks, or portfolios.
Formula Used
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1
Example
If you invested Rs. 10,000 and it grew to Rs. 16,000 in 3 years, the CAGR would be calculated as:
CAGR = (16000 / 10000)^(1/3) - 1
= (1.6)^(0.333) - 1
= 0.1699 or 16.99% per year
Frequently Asked Questions (FAQs)
What does CAGR tell you?
CAGR tells you the annual return required to grow your investment from the beginning value to the ending value over a set period.
Is CAGR the same as annual return?
No. CAGR assumes constant growth, while actual annual returns may fluctuate year to year.
Can I use CAGR to compare two mutual funds?
Yes, CAGR is a useful metric to compare long-term performance of mutual funds.
What if I have irregular investments?
For irregular investments, use XIRR instead of CAGR to get a more accurate return.