What is CAGR? Understanding Compound Annual Growth Rate
CAGR turns an uneven, bumpy investment journey into a single steady annual number. Here's what that number does and doesn't tell you.
What is CAGR?
Compound Annual Growth Rate (CAGR) is the smoothed annual growth rate an investment would need to grow steadily from a starting value to an ending value over a given period. It replaces the investment's actual, uneven year-to-year path with a single constant rate that would have produced the same overall result.
When CAGR helps
- Comparing investments held for different durations, where a simple total-return percentage would not account for time.
- Comparing the same investment across different time windows, such as its 3-year versus 10-year performance.
- Understanding a mutual fund's quoted historical returns, which are almost always expressed as CAGR.
A worked example
Consider an investment worth ₹5,00,000 that grows to ₹9,00,000 over 5 years.
| Metric | Value |
|---|---|
| Beginning value | ₹5,00,000.00 |
| Ending value | ₹9,00,000.00 |
| Investment period | 5 years |
| CAGR | 12.47% |
| Absolute gain | ₹4,00,000.00 |
Try your own starting value, ending value, and period in the CAGR Calculator.
How to use CAGR
CAGR is best used to compare investments or funds against each other on a like-for-like basis, not to predict future returns. A high historical CAGR describes what already happened over that specific period; it does not guarantee the same rate will continue.
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Frequently asked questions
Is CAGR the same as annual return?
No — CAGR smooths returns into a single steady annual rate; actual year-to-year returns can vary significantly around it.
Can CAGR be negative?
Yes, if the ending value is lower than the starting value, indicating an overall decline over the period.
Does CAGR account for volatility?
No — CAGR only looks at the start and end values, not the path between them.