The "average speed" of your money
If you drove from Delhi to Mumbai (1,400 km) in 20 hours, your average speed was 70 km/h — even though you went faster on highways and slower in cities. CAGR is the average speed of your investment, smoothing out the ups and downs.
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.
CAGR in Action
₹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 = 12% p.a. This means your money grew as if it earned exactly 12% every single year, even though the actual journey was bumpy.
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%. The actual journey was bumpy, but CAGR shows the smooth equivalent. Don't assume future years will be 12% too.
CAGR Limitations
- Only works for lumpsum — single investment, single exit
- Ignores intermediate cash flows — can't measure SIP returns
- Sensitive to start/end date — different dates = different CAGR
- Past CAGR ≠ future returns — don't assume it'll continue
What's a "Good" CAGR?
| Asset Class | Typical 10Y CAGR |
|---|---|
| Savings Account | 3-4% |
| Fixed Deposit | 6-7% |
| Debt Funds | 7-8% |
| Large Cap Equity | 10-14% |
| Mid/Small Cap | 12-18% |
| Nifty 50 Index | ~12% |
Key Takeaway
CAGR is the gold standard for measuring lumpsum performance. But for SIPs (multiple cash flows), you need XIRR — which we cover in the next lesson.
Your Next Step
Use our Lumpsum Calculator to see CAGR-based projections for your investment amount.