What is CAGR?
Compound Annual Growth Rate is the single yearly rate at which an investment would have to grow, compounding every year, to get from its starting value to its ending value over a given period. It smooths out the ups and downs in between, which makes it the standard way to compare mutual funds, stocks, property, business revenue or anything else that grows over different lengths of time. When a fund fact sheet says “5-year return: 14.2%”, that figure is a CAGR.
The formula
CAGR = (Final value ÷ Initial value)^(1 ÷ number of years) − 1
For example, ₹1 lakh that becomes ₹2.5 lakh in 5 years has a CAGR of (2.5)^(1/5) − 1 = 20.1% a year. The calculator accepts fractional years, so an investment held for 2 years and 6 months can be entered as 2.5.
CAGR vs absolute return
Absolute return simply divides the gain by the starting amount: ₹1 lakh to ₹2.5 lakh is a 150% absolute return whether it took 3 years or 15. That number says nothing about speed. CAGR translates it into a yearly rate, so 150% over 5 years (20.1% CAGR) is clearly better than 150% over 15 years (6.3% CAGR). Always compare investments on CAGR, and always over the same period, because a fund’s 3-year and 10-year CAGRs can differ widely.
When CAGR is the wrong tool
CAGR assumes one lump sum went in at the start and nothing was added or withdrawn. It cannot describe a SIP, a portfolio with regular top-ups, or a business with uneven cash flows. For those, use XIRR (extended internal rate of return), which weighs every cash flow by its date; for a regular monthly investment, the SIP calculator on this site does the equivalent calculation. CAGR also hides volatility: two funds with the same 12% CAGR may have taken very different paths, and the one with wilder swings is riskier even though the end result matches.
Reverse uses of the formula
Rearranging the formula answers other questions. To find how long money takes to double at a given rate, divide 72 by the rate (the rule of 72): at 12% CAGR, roughly 6 years. To find the value after n years at a known CAGR, multiply the starting value by (1 + CAGR)^n, which is exactly what the year-by-year table above does.
Typical CAGRs in India
Over the long run, the Nifty 50 has delivered roughly 11–13% CAGR including dividends, bank fixed deposits 6–7.5%, PPF 7–8%, gold around 9–10% and residential property in most cities 5–8% before costs. Inflation has averaged about 5–6%, so an investment must beat that CAGR just to preserve purchasing power. Use these figures as reference points when judging a return someone quotes to you.
Frequently asked questions
What is the CAGR formula?
CAGR = (Final value ÷ Initial value)^(1 ÷ years) − 1. It is the constant yearly rate that would take the initial value to the final value over the period.
What is the difference between CAGR and absolute return?
Absolute return is the total gain as a percentage of the starting value, regardless of time. CAGR spreads that gain evenly across years so you can compare investments of different durations.
Is CAGR the same as XIRR?
No. CAGR works for a single investment with one start and one end value. XIRR handles multiple cash flows on different dates, such as SIPs. For a SIP use the SIP calculator.