What is CAGR?
CAGR (Compound Annual Growth Rate) represents the average annual growth rate of an investment over a specified time period, smoothing out volatility. It answers the question: "If your investment grew at a steady rate each year, what would that rate be?"
Think of it as your portfolio’s “average speed” over time.
✅ Why CAGR Matters
Consider this: a $10,000 investment grows to $20,000 in 5 years. That translates to a CAGR of 14.87%—even if the investment's annual returns were inconsistent.
Unlike absolute returns, CAGR gives a fair, apples-to-apples comparison across different timeframes, whether you're evaluating stocks, mutual funds, or business performance.
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How to Use the CAGR Calculator
Enter three key figures:
- Initial investment (e.g., $10,000)
- Final value (e.g., $25,000)
- Time period (e.g., 7 years)
The tool will instantly display your CAGR % and a visual growth chart.
? Pro Tip: For investments with recurring contributions like SIPs (Systematic Investment Plans), use an XIRR calculator instead.
Live Example:
$10,000 → $19,672 in 8 years
CAGR = 8.5%
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CAGR Formula & Manual Calculation
The standard formula for CAGR is:
CAGR=(Final ValueInitial Value)1Years−1\text{CAGR} = \left( \frac{\text{Final Value}}{\text{Initial Value}} ight)^{\frac{1}{\text{Years}}} - 1CAGR=(Initial ValueFinal Value)Years1−1
Example:
- Initial Value (IV): $5,000
- Final Value (FV): $12,000
- Years (n): 6
CAGR=(12,0005,000)16−1=15.10%\text{CAGR} = \left( \frac{12,000}{5,000} ight)^{\frac{1}{6}} - 1 = 15.10\%CAGR=(5,00012,000)61−1=15.10%
? Excel Shortcut:
=((FV/IV)^(1/n))-1
CAGR vs. Other Metrics
Metric | Pros | Cons | Best Used For |
CAGR | Smooths volatility | Ignores cash flows | Long-term comparisons |
AAGR | Shows yearly trends | Overstates performance in volatility | Short-term trend analysis |
Absolute Return | Simple to calculate | Can mislead over long periods | Quick profit/loss snapshots |
Real-World CAGR Examples
? Case 1: Stock vs. Mutual Fund Performance
- Stock A: $8,000 → $22,000 over 10 years → CAGR: 10.66%
- Fund B: $8,000 → $18,000 over 10 years → CAGR: 8.45%
? Takeaway: Higher final value doesn’t always mean higher CAGR.
? Case 2: Business Revenue Growth
A startup scales revenue from $200,000 (Year 1) to $1.2 million (Year 5).
Even with ups and downs in between, the CAGR = 43.09%.
Limitations of CAGR
⚠️ Use with caution in scenarios where:
- Volatility matters: A 50% drop followed by a 50% gain results in a loss, not zero.
- Cash flows exist: CAGR doesn't account for additional investments or withdrawals. Use XIRR instead.
- Short timeframes: CAGR over 1–2 years can be distorted by outliers.
FAQ: Quick Answers
Q: Is CAGR the same as ROI?
A: No. ROI shows total return, while CAGR expresses it as a consistent annual rate.
Q: Can CAGR be negative?
A: Yes. Example: $10,000 → $7,000 in 3 years = -10.06% CAGR
Q: What is a good CAGR for stocks?
A: Historically, the stock market averages around 8–10% CAGR.
