The CAGR formula
CAGR = (Ending value ÷ Starting value)1 ÷ years − 1
For ₹1 lakh becoming ₹2.5 lakh in 5 years: (2.5)0.2 − 1 = 0.2011, or 20.11% a year.
How to use it
- Starting value: what you invested, or the value on the start date.
- Ending value: today's value, or the value on the end date.
- Time between them in years. Use decimals for part years; 3 years and 6 months is 3.5.
You also get the absolute return, the simple yearly average, and how long the investment takes to double at that CAGR.
Why CAGR beats "average return"
Say a fund rises 50% in year one and falls 50% in year two. The average of the two years is 0%, which sounds like you broke even. You did not: ₹1 lakh became ₹1.5 lakh and then ₹75,000. The CAGR, −13.4% a year, tells the truth. Averages flatter volatile investments; CAGR doesn't.
CAGR, absolute return and XIRR
| Measure | Use it for |
|---|---|
| Absolute return | Short holdings, under a year |
| CAGR | One investment with one start and one end value: a lumpsum, a stock, a property, an index |
| XIRR | Money going in or out on different dates: SIPs, top-ups, withdrawals |
For a SIP, don't calculate CAGR on the total invested and the current value. It understates your return, because most of the money wasn't invested for the full period. Your mutual fund statement shows XIRR; use that instead.
Using CAGR well
- Compare like with like: a fund's 5-year CAGR against its benchmark's 5-year CAGR over the same dates.
- Watch the start date. A CAGR measured from a market low looks brilliant; from a peak, poor. Look at several periods.
- Past CAGR is not a forecast. It describes what happened, not what will happen.
Want to project forward instead? The lumpsum calculator takes a CAGR and gives the future value.
Questions people ask
What is a good CAGR for mutual funds?
It depends on the fund type and the period. Compare a fund's CAGR with its benchmark index and with similar funds over the same dates, rather than with a fixed number.
How do I calculate CAGR for 3 years?
Divide the ending value by the starting value, raise the result to the power 1/3, and subtract 1. ₹1 lakh growing to ₹1.5 lakh in 3 years is a CAGR of about 14.5%.
What is the difference between CAGR and absolute return?
Absolute return is the total percentage gain over the whole period. CAGR spreads that gain into an equal yearly rate. 150% absolute over 5 years is about 20.1% CAGR.
Can CAGR be negative?
Yes. If the ending value is below the starting value, the CAGR is negative. ₹1 lakh falling to ₹75,000 over 2 years is a CAGR of −13.4%.
Should I use CAGR or XIRR for my SIP?
XIRR. CAGR assumes one investment on one date, which is not how a SIP works.