The Compound Annual Growth Rate (CAGR) is a useful metric that shows the average yearly growth rate of an investment or financial metric over a specific time period longer than one year. Think of it as the steady, fixed annual return required for an investment to grow from its starting value to its ending value, assuming all profits were reinvested each year. CAGR is crucial because it smoothes out volatile yearly fluctuations, providing a clearer, standardised figure for comparing the performance of different investments or businesses over time.
The formula for the Compound Annual Growth Rate (CAGR) calculator is:
CAGR = (FV / PV)(1 / n) – 1
Where FV is future value, PV is present value and n is number of years.
It allows for fair, standardised comparison between different investments (like stocks, mutual funds, or portfolios) by providing a single, annualised growth rate.
The calculator removes the noise of yearly ups and downs, giving you a clearer picture of the true underlying performance over a long period.
It's essential for measuring the historical success of an investment against its initial goals or against relevant market benchmarks.
You can use it to determine the required growth rate needed to reach future financial goals.
Using an online CAGR calculator is simple and requires only three main inputs:
Imagine you invested Rs 1,000 (Initial Investment) five years ago, and it's now worth Rs 1,500 (Final Investment). You would input Rs 1,000, Rs 1,500, and 5 into the calculator. It calculates the CAGR to be approximately 8.45%. This means your investment grew at a consistent average rate of 8.45% each year over the five-year period.
A favourable CAGR percentage for an investment is typically considered to be 7% to 10% or higher. A higher CAGR, such as above 10%, is often considered excellent, signaling strong, market-outperforming growth.
Yes, while CAGR is primarily an annual measure, you can apply its compounding logic month-wise to find the Compound Monthly Growth Rate (CMGR). You use the number of months instead of years in the formula's exponent. This gives a more granular view for shorter-term performance analysis.
Yes, while CAGR is primarily an annual measure, you can apply its compounding logic month-wise to find the Compound Monthly Growth Rate (CMGR). You use the number of months instead of years in the formula's exponent. This gives a more granular view for shorter-term performance analysis.
CAGR (Compound Annual Growth Rate) calculates the average annual return for a single lump-sum investment, only considering the starting and ending values. XIRR (Extended Internal Rate of Return) is more precise, calculating the annualised return for investments with multiple, irregular cash flows (like SIPs) by factoring in the exact dates and amounts of every transaction.
A CAGR calculator helps us understand the average annual return of an investment, smooths out yearly volatility, measures past performance against benchmarks, and shows the required growth rate to meet future financial goals.
