Compound Annual Growth Rate — CAGR — is the single most useful number for comparing investment performance across different time periods and asset classes. It answers the question: at what steady annual rate did this investment grow?
The CAGR formula
CAGR is calculated using the geometric mean of growth:
CAGR (%) = ((End Value / Start Value)^(1 / Years) − 1) × 100
Where:
- End Value is the final or current value of the investment
- Start Value is the purchase price or initial value
- Years is the holding period in years (fractional years are supported)
Worked example
You invested ₹1,00,000 in a mutual fund in 2019. In 2024 (5 years later), the value is ₹2,01,136.
CAGR = (2,01,136 / 1,00,000)^(1/5) − 1 = 2.01136^0.2 − 1 = 1.15 − 1 = 0.15 = 15% CAGR
Use the Stock CAGR Calculator to verify: enter ₹1,00,000 start, ₹2,01,136 end, 5 years → 15% CAGR.
CAGR vs absolute return
Absolute return (also called total return) is the simple percentage change from start to end:
Absolute return (%) = (End − Start) / Start × 100
In the example above: (2,01,136 − 1,00,000) / 1,00,000 × 100 = 101.1% absolute return
The difference between CAGR and absolute return: absolute return tells you the total gain or loss, but says nothing about time. A 100% return over 1 year and a 100% return over 10 years are very different achievements. CAGR normalises for time, making comparisons valid.
| Investment | Start | End | Years | Absolute return | CAGR |
|---|---|---|---|---|---|
| Stock A | ₹10,000 | ₹30,000 | 10 | 200% | 11.6% |
| Stock B | ₹10,000 | ₹25,000 | 7 | 150% | 13.9% |
| Stock C | ₹10,000 | ₹18,000 | 4 | 80% | 15.8% |
Looking at absolute return alone, Stock A seems best. By CAGR, Stock C outperformed. The CAGR is the right metric for comparing investments held for different durations.
The Rule of 72
The Rule of 72 is a mental shortcut to estimate how long an investment takes to double:
Years to double ≈ 72 / CAGR (%)
| CAGR | Years to double |
|---|---|
| 6% | 12 years |
| 8% | 9 years |
| 10% | 7.2 years |
| 12% | 6 years |
| 15% | 4.8 years |
| 18% | 4 years |
| 24% | 3 years |
The rule is accurate for rates between about 5% and 20%. At very high or very low rates, the approximation degrades. At 6% CAGR, a ₹10,000 investment becomes ₹20,000 in 12 years; the Compound Interest Calculator can show the exact trajectory.
Using CAGR to evaluate investments
Comparing against an index: Calculate the CAGR of your portfolio or holding and compare it to the relevant benchmark — Nifty 50 (~12–14% over 20 years), Sensex, S&P 500 (~10% long-run). If your CAGR is consistently below the index, a passive index fund might serve you better.
Comparing across asset classes: Real estate, gold, fixed deposits, and equity all have different risk profiles and CAGR patterns. Indian residential real estate has delivered roughly 8–12% CAGR in major cities over 15 years. Gold has averaged about 11% CAGR in INR terms over 20 years. Bank FDs offer 6–7%. Comparing CAGR across these assets on a level playing field helps with allocation decisions.
Evaluating a fund’s track record: Fund fact sheets often show 1-year, 3-year, and 5-year returns. These are all CAGRs (assuming point-to-point calculation). A fund with 12% CAGR over 10 years has more credibility than one with 30% CAGR over 2 years — the longer the track record, the more meaningful the CAGR.
Business revenue growth: CAGR is used in corporate analysis to measure revenue, profit, or market cap growth. A startup growing revenue at 40% CAGR for 5 years is scaling fast; a mature company at 8% CAGR may be growing in line with GDP.
Common CAGR pitfalls
Ignoring dividends: Price-only CAGR understates the actual return for dividend-paying stocks. Always use the total return value (including reinvested dividends) for an accurate picture.
Mistaking CAGR for average return: If a stock gains 100% in year 1 and loses 50% in year 2, the arithmetic average is 25% — but you end up exactly where you started. The CAGR is 0%. The geometric mean (CAGR) is the correct measure of what actually happened to your money.
Short time periods: A 6-month or 1-year CAGR is highly influenced by entry and exit timing. CAGRs over periods shorter than 3–5 years are noisy and can be misleading. Long-period CAGRs (10+ years) are more meaningful and more comparable across investments.
Survivorship bias: Published fund CAGRs typically cover funds that survived. Funds that closed or merged because of poor performance are not counted. Compare funds with this bias in mind — the average published CAGR tends to be higher than what the average investor achieved.
Calculating CAGR for fractional years
The Stock CAGR Calculator supports fractional years. Enter 2.5 for 2 years and 6 months, 0.75 for 9 months. The formula handles fractional exponents correctly: (End/Start)^(1/2.5) gives the annualised rate even for partial-year periods. This is particularly useful for evaluating recent IPO performance or mid-year portfolio snapshots.
This article is for general informational purposes only and is not investment advice. Consult a SEBI-registered investment adviser before making investment decisions.