How CAGR is calculated
CAGR = (Final value ÷ Initial value)^(1 ÷ years) − 1. An investment that grew from 10,000 to 25,000 over 8 years has a CAGR of about 12.1%, even if the actual journey included crashes and rallies.
Because it annualizes, CAGR lets you compare a 3-year investment against a 10-year one fairly. Absolute returns cannot do that: 150% over 8 years sounds bigger than 40% over 2 years, but the second is the better annual performer.
What CAGR hides
CAGR says nothing about volatility or risk. Two funds can share a 12% CAGR while one glided smoothly and the other halved twice along the way. It also ignores cash flows: if you added or withdrew money during the period, use XIRR instead, which handles irregular investments.
Benchmarks worth knowing
Over multi-decade periods, broad equity indices have delivered roughly 10 to 12% CAGR in India and 7 to 10% in the US. Fixed deposits typically run 5 to 7%. Any pitch promising a sustained CAGR far above these deserves heavy skepticism.
Frequently asked questions
What is the difference between CAGR and absolute return?
Absolute return is total growth over the whole period, e.g. 150%. CAGR converts that into a steady per-year rate, letting you compare investments held for different durations.
When should I use XIRR instead of CAGR?
Use CAGR for a single lump sum with no additions or withdrawals. Use XIRR whenever money moved in or out during the period, such as monthly SIPs or partial redemptions.
Can CAGR be negative?
Yes. If the final value is below the initial value, CAGR is negative, meaning the investment shrank at that steady annual rate.
Does CAGR include dividends?
Only if your final value includes them. For a fair picture, use the total value including reinvested dividends or interest, not just the price.
Is a higher CAGR always better?
Not by itself. A higher CAGR earned with extreme volatility or leverage may be worse risk-adjusted than a steadier, slightly lower one. Compare risk alongside return.
What is a good CAGR?
Context decides. Beating inflation by 5 or more percentage points over a decade is a strong result. For equities, 12%+ sustained over 10 years is excellent; for a savings product, 7% would be.