A Compound Annual Growth Rate or CAGR calculator is a financial tool that helps investors calculate the annual growth rate of their investments over a specified period. It represents the mean annual growth rate of an investment assuming it grows at a steady rate. Unlike simple growth rate calculations, CAGR takes into account the effect of compounding, which makes it a more accurate measure to track investment performance over time. calculator is commonly used to evaluate the returns on stocks, mutual funds, or other assets, and compare their growth rates to make informed decisions.
A CAGR calculator works through the following steps:
1. Input Initial and Final Values: Enter the initial investment value and the final value after the investment period.
2. Enter the Investment Period: Input the total number of years the investment was held.
3. Calculate Growth Rate: The calculator uses these inputs to compute the CAGR, showing the average annual growth rate.
The CAGR calculator uses the formula:
CAGR = (FV / PV)(1 / n) – 1
In the above formula:
FV = future value | PV = present value | n = number of years.
Provides a precise annual growth rate by considering compounding.
Helps compare different investment options by calculating their respective CAGRs.
Eliminates the impact of short-term volatility, giving a long-term view.
Assists in making sound investment choices based on historical performance.
Helps in setting realistic financial goals by understanding growth trends.
Using a CAGR calculator is straightforward. Start by entering the initial value of your investment, which is the amount you initially invested. Next, input the final value of the investment after the specified period, representing how much the investment is worth now. Finally, enter the number of years over which the investment was held. After entering these details:
Imagine you invested ₹1,00,000 in a mutual fund five years ago, and its current value is ₹1,80,000. By using a CAGR calculator, you can determine that the investment has grown at an average annual rate of approximately 12.59%. This insight helps you understand the performance of your investment over time, aiding in future investment decisions.
A favourable CAGR (Compound Annual Growth Rate) isn't a fixed number; it depends on the industry, company maturity, and economic conditions. Generally, a CAGR above 8-10% is considered good, indicating strong growth. However, high-growth industries might see 20-30% as favourable, while mature industries might be content with 5-7%.
While CAGR (Compound Annual Growth Rate) is primarily an annual rate, you can adapt its underlying principle to calculate a Compound Monthly Growth Rate (CMGR). The formula is similar, but instead of "number of years," you'd use "number of months" as the exponent. This provides a more granular view for shorter periods.
To calculate a company's CAGR, you need its Beginning Value, Ending Value, and the Number of Years in between. The formula is:
CAGR = [(EndingValue/BeginningValue)(1/NumberofYears)]−1
Multiply the result by 100 to get the percentage. This smoothens out irregular year-on-year growth to show an average annual rate.
CAGR shows a smoothed average annual growth for a lump-sum investment over a period. XIRR, however, is for investments with multiple, irregular cash flows (like SIPs), accounting for the exact dates and amounts of each transaction to give a more accurate annualized return.
A CAGR calculator helps you understand the average annual growth rate of an investment over a period, smoothing out volatility. It's great for comparing different investment options, evaluating past performance against benchmarks, and assessing if your long-term financial goals are on track.
