What is CAGR (Compound Annual Growth Rate)?
CAGR (Compound Annual Growth Rate) is the mean annual growth rate of an investment over a specified period longer than one year. Unlike simple returns, CAGR smooths out the volatility of year-over-year growth and tells you what consistent annual return would have taken your investment from its starting value to its ending value. Think of CAGR as the "smoothed" rate of return. If your investment grew 50% in year one and lost 10% in year two, the CAGR gives you one single percentage that represents steady, consistent growth—as if your investment grew at the same rate every year. CAGR is a valuable metric for comparing investment performance, setting growth targets, and evaluating business expansion over time. It's particularly useful because it accounts for the compounding effect of returns.
CAGR Formula
How to use this calculator
- Enter the initial value—your investment's starting amount
- Enter the final value—what your investment is worth now
- Set the time period in years—how long you held the investment
- View your CAGR percentage along with total growth and absolute gain
When Should You Use CAGR?
- Comparing investments with different holding periods on an apples-to-apples basis
- Evaluating mutual fund or portfolio performance over multiple years
- Setting realistic business revenue or growth targets
- Analyzing historical company growth for stock valuation
- Measuring real estate appreciation over your ownership period
- Projecting future values based on historical growth rates
Real-World Examples
Mutual Fund Investment
You invested ₹1,00,000 in an equity mutual fund 5 years ago. Today it's worth ₹2,50,000.
💡 Your fund delivered 20.11% annually on average—significantly better than the typical 12-15% equity benchmark. This is excellent long-term performance.
Business Revenue Growth
Your startup had revenue of ₹50 lakhs in 2020 and ₹2 crores in 2024.
💡 A 41% CAGR is exceptional business growth. This growth rate would interest venture capital investors and indicates strong product-market fit.
Fixed Deposit Comparison
Bank FD offered 7% interest. Your ₹5,00,000 investment became ₹6,50,000 in 4 years.
💡 The actual CAGR of 6.78% is close to the stated 7%, with small differences due to compounding frequency. Use this to compare with other investment options.
CAGR vs Other Growth Metrics
Choose the right metric for your analysis needs.
| Feature | CAGR | Absolute Return | Average Return |
|---|---|---|---|
| Accounts for Time | Yes | No | No |
| Accounts for Compounding | Yes | No | No |
| Smooths Volatility | Yes | N/A | Partially |
| Easy to Calculate | Moderate | Simple | Simple |
| Best Use Case | Long-term comparison | Quick snapshot | Yearly average |
Common CAGR Calculation Mistakes (Avoid These Pitfalls)
Using CAGR for SIP investments
The Issue:CAGR assumes lump sum investment at start. SIPs have multiple entry points
Ignoring the time period selection
The Issue:Cherry-picking favorable periods can inflate CAGR artificially
Comparing CAGR without considering risk
The Issue:A 15% CAGR with 50% volatility is very different from 12% CAGR with 20% volatility
Pro Tips for Using CAGR
CAGR vs Simple Average Return
Simple average can be misleading. If an investment grows 100% in year one and drops 50% in year two, the simple average is +25% but you're actually back where you started (CAGR = 0%). CAGR gives you the real picture by accounting for compounding.
The Rule of 72
A quick mental math trick: divide 72 by your CAGR to estimate how many years it takes to double your money. At 12% CAGR, your money doubles in about 6 years (72 ÷ 12 = 6). At 8% CAGR, it takes 9 years.
Frequently Asked Questions
What is a good CAGR?
A good CAGR depends on the asset class and risk. Fixed deposits: 6-7%. Debt funds: 7-9%. Large-cap equity: 10-12%. Mid/small-cap equity: 12-18%. High-growth stocks: 15-25%. Any CAGR beating inflation (5-6%) preserves purchasing power; beating FD rates (7%) generates real returns.
How is CAGR different from absolute returns?
Absolute return shows total gain regardless of time (e.g., +50%), while CAGR normalizes it to a yearly rate. ₹1 lakh becoming ₹2 lakh is 100% absolute return, but if it took 5 years, CAGR is only 14.87%. CAGR enables fair comparison between investments of different durations.
Can CAGR be negative?
Yes, if the final value is less than the initial value, CAGR will be negative. For example, if ₹1,00,000 becomes ₹80,000 over 2 years, CAGR is -10.56%. This indicates your investment lost value at an average rate of 10.56% per year.
Why doesn't CAGR work for SIP investments?
CAGR assumes a single lump sum investment at the start. SIPs involve multiple investments at different times. For SIPs, use XIRR (Extended Internal Rate of Return) which accounts for the timing and size of each cash flow to give accurate returns.
How do I calculate CAGR for my portfolio?
Use the portfolio's total value at the start and end of your measurement period. Don't just average individual stock CAGRs—that ignores allocation. If you added or withdrew funds during the period, XIRR is more appropriate than CAGR.