What is CAGR?
Compound Annual Growth Rate (CAGR) is the smooth annualized return that would take an initial value to a final value over a given period. It's the single most-used number for comparing investments — funds advertise it, fund houses report it, and every "best mutual fund" listicle ranks by it.
CAGR ignores year-to-year volatility — it's the equivalent constant rate that produces the same start-to-end result. Two investments with identical CAGRs can have wildly different rides; CAGR alone doesn't tell you about risk.
How is CAGR calculated?
CAGR = (Final / Initial)^(1/n) − 1
where n is the number of years. Expressed as %:
CAGR % = (Final / Initial)^(1/n) − 1) × 100
Worked example
You invested ₹1 lakh 8 years ago. Today it's worth ₹2.5 lakh.
CAGR = (250000 / 100000)^(1/8) − 1
= 2.5^0.125 − 1
= 1.1214 − 1
= 0.1214
= 12.14% per year
Your investment grew at an annualized rate of 12.14% — the same growth as if you'd earned exactly 12.14% every year (instead of the actual lumpy 4%, 25%, −10%, 18%, etc.).
CAGR vs Absolute Return
| Metric | Formula | Use when |
|---|---|---|
| Absolute return | (Final − Initial) / Initial × 100 | Comparing short tenures or interpreting a single completed investment |
| CAGR | Above | Comparing investments of different durations |
For 100% absolute return over 2 years: CAGR = 41.42%. Over 10 years: CAGR = 7.18%. Same absolute return, vastly different rates.
When CAGR misleads you
- Two funds, same CAGR, different volatility — Fund A goes 12, 12, 12, 12, 12; Fund B goes 50, −20, 40, −15, 8. Both have ~12% CAGR. Fund B is much riskier.
- Single-year point measurements — CAGR from 1 Jan 2020 to 1 Jan 2023 will look very different from 1 Mar 2020 (COVID crash) to 1 Mar 2023. Always check 3-year/5-year/10-year rolling CAGRs.
- Excludes SIP/staggered investing — CAGR is for lumpsum starts. For SIPs, use XIRR (which weights each instalment's holding period).
Components and inputs explained
Initial value
Your starting principal. For mutual funds, this is the amount invested (not NAV).
Final value
What it's worth now. Use today's NAV × units (mutual funds) or current price × shares (stocks).
Number of years
Calendar years between start and end. Fractional years allowed (e.g. 2.5 years).
Typical Indian CAGRs by asset class (15-year rolling)
| Asset | Typical CAGR |
|---|---|
| Nifty 50 index | 11–13% |
| Mid-cap mutual funds | 12–15% |
| Small-cap funds | 13–18% (with much higher volatility) |
| Hybrid balanced funds | 9–11% |
| Debt funds | 6–8% |
| PPF | 7.1% (constant) |
| Gold (rupee terms) | 8–10% |
| Real estate (urban India) | 6–9% appreciation |
| Fixed deposit | 6–7% pre-tax |
Considerations
- CAGR ≠ average return. Average of yearly returns will always exceed CAGR if there's any volatility (math: arithmetic mean ≥ geometric mean).
- Don't compare CAGRs across different periods. A fund's 3-year CAGR and another fund's 5-year CAGR aren't apples-to-apples.
- Survivorship bias — closed funds disappear from CAGR tables, making the surviving cohort look better than reality.
- Currency adjustments — international fund CAGRs in INR include FX gains/losses; in USD they're pure return. Know which one you're seeing.
Limitations
- CAGR assumes lumpsum entry — for SIP, use XIRR.
- Doesn't show volatility, max drawdown, or Sharpe ratio.
- Sensitive to start/end dates — small shifts can change the answer dramatically.
- Doesn't account for taxes or fees (your effective post-tax CAGR is lower).
Related calculators
- XIRR — annualized return for irregular flows (SIP)
- Compound Interest — going forward (FV from rate)
- SIP — projection for monthly contributions
- Lumpsum — projection for one-time investments
- ROI — absolute return + annualized return together
- Mutual Fund Returns — NAV-based return calculation
Final note. CAGR is a single-number summary that hides every interesting thing about an investment journey. Use it to compare and rank — but never make a buy/sell decision on CAGR alone. Always pair CAGR with max drawdown and standard deviation to understand the ride, not just the destination.