What CAGR tells you
CAGR (compound annual growth rate) answers one question: if this investment had grown at the same rate every single year, what would that rate be? Real investments zig-zag, but CAGR smooths the journey into one comparable number. That makes it the fairest way to compare a fund, a stock, a property and a fixed deposit over different periods.
CAGR = (Ending value ÷ Starting value)^(1 ÷ years) − 1Worked example
CAGR vs absolute return vs XIRR
| Measure | Use it when |
|---|---|
| Absolute return | The period is under a year, or you only want the total percentage gain. |
| CAGR | There was one investment at the start and one value at the end. |
| XIRR | Money went in or came out at different times, such as SIPs, top-ups or partial withdrawals. Use the XIRR calculator. |
Where people misuse CAGR
- Applying it to SIPs. A SIP's total invested vs current value gives a misleading CAGR because most instalments were invested for far fewer years. Use XIRR instead.
- Cherry-picked periods. A fund's 3-year CAGR starting at a market low looks spectacular. Check several periods.
- Ignoring the path. Two investments with the same CAGR can have very different ups and downs. CAGR says nothing about risk.
CAGR also works for business numbers. If your shop's annual sales grew from ₹12 lakh to ₹20 lakh in four years, enter those figures to see your revenue growth rate.
CAGR of common Indian benchmarks
To judge your own CAGR, compare it with what you could have earned elsewhere over the same period: an index fund tracking the Nifty 50, a PPF account (currently 7.1% tax-free), or a bank FD. A 9% CAGR looks good until you learn the index did 13% over the same dates. Always compare like with like.
Frequently asked questions
Is a higher CAGR always better?
Not by itself. Compare CAGR over the same period, and consider how volatile the investment was on the way.
Can CAGR be negative?
Yes. If the ending value is below the starting value, CAGR is negative, showing the average yearly loss.
How is CAGR different from average annual return?
An average of yearly returns ignores compounding and can overstate performance. CAGR is the rate that actually links the start and end values.