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GlossaryReturns & risk

CAGR

Compound Annual Growth Rate

The steady yearly growth rate that would take an investment from its starting value to its ending value over a given period.

Compound Annual Growth Rate answers a simple question: if an investment had grown at the same rate every year, what would that rate have been? It smooths a bumpy path into one annualised number, which makes investments held over different periods easier to compare.

Why it matters

Absolute returns mislead over long periods. A 100% gain sounds impressive, but over 12 years it works out to roughly 6% a year. CAGR puts every result on a per-year basis — the same basis used for inflation, deposit rates and goal planning.

How to read it

  • CAGR suits a single investment with one start value and one end value. For SIPs, top-ups or withdrawals, use XIRR.
  • It hides volatility. Two investments with the same CAGR may have travelled very different paths — one steady, one with deep falls along the way. Pair it with a risk measure such as standard deviation.
  • Start and end dates matter. A CAGR measured from a market low looks better than one measured from a high.

Common misconceptions

  • “CAGR is what I earned each year.” It is a hypothetical constant rate; actual yearly returns may have ranged widely.
  • “Past CAGR is a forecast.” It describes one specific window of history.

In India: Mutual fund factsheets report returns for periods longer than one year on an annualised (CAGR) basis, alongside the benchmark’s return for the same period.

Formula

CAGR = (Ending value ÷ Beginning value)^(1 ÷ Number of years) − 1

Worked example

For illustration, assume ₹1,00,000 grows to ₹2,00,000 in 6 years. CAGR = (2,00,000 ÷ 1,00,000)^(1/6) − 1 = 2^(1/6) − 1 ≈ 12.2% a year.

Figures are for illustration only — not a forecast or a recommendation.

Related terms

  • XIRR

    Extended Internal Rate of Return

    An annualised return for investments with several cash flows on irregular dates, such as SIPs, top-ups and partial withdrawals.

  • Compounding

    Earning returns on past returns as well as on the original amount, so growth accelerates the longer money stays invested.

  • Real return

    Your return after accounting for inflation — the growth in what your money can actually buy.

  • Standard deviation

    A measure of how widely an investment’s returns have varied around their average; a higher figure means a bumpier ride.

  • Benchmark

    The index a fund’s performance is measured against, chosen to represent the market or segment the fund invests in.