What is Compound Annual Growth Rate (CAGR)?

Compound Annual Growth Rate (CAGR) is the annual growth of your investments over a specific period of time. In other words, it is a measure of how much you have earned on your investments every year during a given interval. This is one of the most accurate methods of calculating the rise or fall of your investment returns over time.

The Compound Annual Growth Rate (CAGR) formula is:

CAGR =
(Ending balance/beginning balance)^1/n - 1

Here,

• Ending balance is the value of the investment at the end of the investment period
• Beginning balance is the value of the investment at the beginning of the investment period
• N is the number of years you have invested

Generally, people tend to look at returns in absolute terms. Imagine you have invested ₹1000 in a particular mutual fund for a period of three years. At the end of the third year, the value of your investment grew to ₹1,850. In absolute terms, your fund has generated a return of 85% over the three years. You could say that your money has nearly doubled during this period. However, this can be a bit misleading. It does not tell you how much your investment has actually grown over each year. This is where CAGR becomes very useful.

Here, let's calculate the CAGR to understand its benefits.

CAGR = [(1850/1000)^(1/3)] - 1

OR

CAGR = 23%

In other words, your investment in the fund has given you an average return of 23% every year over the last three years.

Essentially, CAGR lets you know the compounded returns you earn on an annual basis irrespective of the individual yearly performances of the fund.

This is because your investments do not grow at the same rate every year. Some years, you may have high returns while during other years, your returns may be lower. In fact, it is possible to earn negative returns too.

CAGR provides you with the information of the average returns earned by a fund every year in a certain time period. This is not a true rate of return. Rather, it is a representational figure of how much your investment growth provided they grew at the same rate every year.

The CAGR calculator is a simple online tool that gives you the annual rate at which your investment has grown. All you need to do is provide certain input data and the calculator does the rest.

You need to input:

• The beginning value of investment
• The ending value of investment
• Number of years of investment

Once you provide this data, the calculator automatically tells you the compounded annual growth rate of the investment.

The CAGR calculator is very useful to mutual fund investors. Using this calculator, you can understand how your fund is performing and take necessary investment actions. Here is how a CAGR calculator can help you:

• Better investment decisions

  The CAGR calculator is a very handy tool to help you analyze your investment decisions every year. For instance, if you have purchased an equity mutual fund five years ago, the CAGR calculator gives you the average rate of returns you have earned every year over the past five years. This can help you understand whether the fund's returns are as per your expectations or not. If the fund is not performing well, you may want to reconsider your investment in the future.

• Compare returns between different funds and benchmarks

  You can also use the CAGR calculator to compare the returns you earn on a particular fund against similar funds. This can help you understand how well the mutual fund is performing compared to its peers. You can also compare against the benchmark indices for greater clarity.

CAGR is a very useful method to calculate the growth rate of an investment. It can be used to evaluate the past returns or estimate the future returns of your investments. However, remember that CAGR works suitably for lumpsum investments. In case of Systematic Investment Plans (SIPs), it does not take the periodic investments into account as it only considers the initial and final values for the calculation. Overall, the CAGR calculator is a very useful tool and it can help you analyse your investments.