What is CAGR?
CAGR or Compound Annual Growth Rate is the rate at which an investment would have grown every year if it had grown at a steady rate, with returns reinvested each year.
Real investments rarely grow at the same rate every year. CAGR smooths out those ups and downs into a single yearly figure, which makes it easy to understand how an investment has performed over time.
CAGR is widely used to compare the performance of mutual funds, stocks and other investments over the same period.
Fun fact
An investment that doubles in 10 years has a CAGR of about 7.2%, which is where the popular “Rule of 72” comes from.
What is a CAGR Calculator?
A CAGR calculator works out the compound annual growth rate of an investment from its starting value, its final value and the number of years it was held.
CAGR describes past growth as a smooth yearly rate. It does not show the ups and downs along the way, and it does not guarantee future returns.
Why you should use a CAGR Calculator?
- Simplifies the process: Calculating CAGR by hand involves fractional powers. The calculator gives you the answer instantly.
- Helps in comparison: Compare investments held for different periods on the same yearly basis.
- Measure performance: See whether an investment has actually met the growth you expected from it.
How Does a CAGR Calculator Work?
The CAGR calculator works on the following inputs:
- Initial Investment (BV): The value of your investment at the start.
- Final Investment (EV): The value of your investment at the end.
- Duration of Investment (N): Number of years for which you held the investment.
The CAGR Calculator relies on the following formula:
CAGR = [(EV ÷ BV)^(1 ÷ N) – 1] × 100
- EV
- Ending value of the investment
- BV
- Beginning value of the investment
- N
- Duration of investment in years
Let’s work through an example for better understanding.
Formula to Calculate CAGR with an Example
Consider an example for a better understanding.
- Initial Investment: ₹1,00,000
- Final Investment: ₹2,00,000
- Duration of Investment: 5 years
Using the formula:
CAGR = [(2,00,000 ÷ 1,00,000)^(1 ÷ 5) – 1] × 100
After calculation, you will get a CAGR of approximately 14.87%.
In conclusion, your investment grew at an average rate of about 14.87% every year to double in 5 years.
What are the benefits of using CAGR?
- Easy to understand: A single yearly percentage is simpler to read than a series of year-by-year returns.
- Fair comparison: Investments held for different lengths of time can be compared on the same yearly basis.
- Goal planning: Knowing the CAGR of an investment helps you estimate how long it may take to reach a target amount.