What is CAGR

What is CAGR

CAGR (Compound Annual Growth Rate) tells you the constant annual rate at which an investment would have grown from its starting value to its ending value.

The Formula

CAGR = [(Ending Value / Beginning Value) ^ (1 / Number of Years)] - 1

Example

₹1,00,000 invested in a fund grew to ₹3,10,585 in 10 years:

CAGR = (3,10,585 / 1,00,000) ^ (1/10) - 1
     = (3.10585) ^ (0.1) - 1
     = 1.12 - 1
     = 12% p.a.

What CAGR Hides

CAGR smooths out volatility. A fund showing 12% CAGR might have had:

• Year 1: +25%
• Year 2: -15%
• Year 3: +30%
• Year 4: +8%
• ...

CAGR Limitations

1. Only works for lumpsum — single investment, single exit
2. Ignores intermediate cash flows — can't measure SIP returns
3. Sensitive to start/end date — different dates = different CAGR
4. Past CAGR ≠ future returns — don't assume it'll continue

What's a "Good" CAGR?