Calculate Compound Annual Growth Rate (CAGR) to measure investment returns or business growth over multiple years with precision.
About CAGR
CAGR (Compound Annual Growth Rate) measures the average annual growth rate of an investment or metric over a specific period. Unlike simple average growth, CAGR accounts for compounding—the process where earnings generate additional earnings. It's the most accurate way to evaluate investment performance, business revenue growth, and other metrics. For example, if an investment grows from ₹1 lakh to ₹3 lakhs in 5 years, the CAGR is 24.6%, meaning it grew by 24.6% on average each year.
How It Works
CAGR uses the formula: CAGR = (Final Value ÷ Initial Value)^(1 ÷ Years) − 1. This formula smooths out volatility and shows the consistent annual growth rate needed to reach the final value from the initial value. It's used by investors, financial advisors, and business analysts to compare performance across different time periods and investments fairly.
Frequently Asked Questions
What is the CAGR formula? ▼
CAGR = (Final Value ÷ Initial Value)^(1 ÷ Number of Years) − 1. If you invest ₹1 lakh and it becomes ₹3 lakhs in 5 years: (3,00,000 ÷ 1,00,000)^(1÷5) − 1 = 24.59% CAGR. This means the investment grew by 24.59% annually.
How is CAGR different from average annual growth? ▼
Average growth simply divides total growth by years. CAGR accounts for compounding effect. If you have returns of 10%, 20%, and 30% over 3 years, average is 20% but CAGR is about 19.8%. CAGR is the accurate measure for investment analysis.
What does 20% CAGR mean over 5 years? ▼
Your investment grew at 20% per year, compounded. ₹1 lakh at 20% CAGR becomes ₹1,00,000 × (1.20)^5 = ₹2,48,832 after 5 years. That's 148.8% total return with only 20% annual growth due to compounding power.
How do I use CAGR to compare investments? ▼
Calculate CAGR for each investment. If mutual fund A has 12% CAGR over 10 years and fund B has 15% CAGR, fund B is better. CAGR removes market volatility noise and shows true annual growth, making fair comparison possible.
Can CAGR be negative? ▼
Yes. If your ₹1 lakh investment drops to ₹80,000 in 2 years, CAGR is about -10.5%. Negative CAGR indicates decline, not growth. Use it to assess losses in underperforming investments.