CAGR
Compound Annual Growth Rate represents the mean annual growth rate of an investment over a specified period longer than one year.
CAGR smooths out year-to-year volatility into a single annualised number. It assumes one lump-sum investment held for the full period, so it is the right measure for a one-time investment but not for a SIP with multiple cash flows — use XIRR there.
Why CAGR matters when comparing products
CAGR provides a consistent metric to compare the performance of various financial products over multi-year periods in India. It annualises returns, allowing investors to understand the average yearly growth rate, even if actual year-on-year returns fluctuate. This standardisation is crucial for evaluating and contrasting investment options like fixed deposits, mutual funds, or equities, enabling a clearer assessment of their historical growth potential without the distraction of interim volatility.
Illustrative example
Suppose an investment of ₹10,000 grew to ₹13,310 over three years. The CAGR would be calculated as ((₹13,310 / ₹10,000)^(1/3)) - 1. This results in a CAGR of 10% per annum. This single 10% figure represents the average annual growth rate, smoothing out any yearly ups and downs, making it easy to compare with other investment options.
Related terms
Extended Internal Rate of Return calculates returns when money is invested or withdrawn at multiple points in time.
The total percentage change in an investment's value, without annualising.
Net Asset Value is the per-unit market value of the securities held by a mutual fund scheme.