CAGR

How it works

Compound Annual Growth Rate expresses lumpy, real-world returns as one steady annual figure. The formula is (Ending Value ÷ Beginning Value) raised to the power of (1 ÷ number of years), minus 1. If you invested ₹1 lakh and it grew to ₹2 lakh in 5 years, the CAGR is roughly 14.9% — meaning a constant 14.9% a year would have produced the same result, even though the actual yearly returns may have swung wildly.

Why it matters

CAGR is the fairest way to compare investments over the same period, because it strips out the noise of good and bad years. A fund that returned +50%, −20% and +30% can be summarised by its CAGR, letting you compare it with an FD or another fund. It also captures compounding — the fact that gains build on previous gains.

In India

Mutual fund factsheets, AMFI, Value Research and apps like Groww all report 3-year, 5-year and 10-year CAGR for schemes. It is the standard yardstick for evaluating equity funds, index funds and even comparing against benchmarks like the Nifty 50 TRI. For lump-sum investments it works perfectly.

Common mistakes

The biggest pitfall: CAGR is the wrong tool for SIPs and any investment with multiple cash flows — for those you need XIRR, which accounts for the timing of each instalment, and using CAGR there will give a misleading number. People also fixate on short-period CAGR (a fund up 40% over one good year looks dazzling), forgetting that a single lucky year can flatter the figure, while long-period CAGR over 7–10 years is far more reliable. Be wary of advertisements that quote since-inception CAGR starting from a market bottom, which inflates the headline. Finally, CAGR hides volatility entirely — two funds with the same CAGR can have wildly different bumpiness, drawdowns and risk along the way, so always read CAGR alongside a measure of risk and the actual year-by-year returns rather than treating one smooth percentage as the whole story.