An investment that grows from ₹1,00,000 to ₹2,00,000 in 5 years has a CAGR of about 14.87%. Its absolute return is 100%, but spread over 5 years that is 14.87% a year.
When to use CAGR
Comparing lump-sum investments held for different periods.
Measuring business growth, such as revenue or users, year over year.
For SIPs or irregular cash flows, use XIRR instead. CAGR assumes a single investment.
Frequently asked questions
Is CAGR the same as average return?
No. A simple average of yearly returns can be misleading. CAGR is the steady yearly rate that would turn the starting value into the ending value, so it is better for comparisons.
What is a good CAGR?
It depends on the asset and risk. Compare a fund's CAGR with its benchmark index and with safe options like PPF or FDs over the same period.
Can CAGR be negative?
Yes. If the ending value is lower than the starting value, CAGR is negative.