Complete guide
Reviewed July 2026CAGR — Compound Annual Growth Rate — answers the most natural question about any investment: "What steady annual rate would have turned my starting value into my ending value over this period?" It smooths out all the interim volatility into one comparable, annualized number.
That comparability is the point. A stock that went from ₹100 to ₹250 in 7 years, a fund NAV that rose from ₹42 to ₹96 in 6, a business whose revenue grew from ₹2 crore to ₹9 crore in 8 — CAGR puts all three on the same yardstick.
Enter your starting value, ending value and time period above for the exact CAGR. Below: the formula, worked examples, why CAGR beats 'average returns', and the situations where CAGR actively misleads.
CAGR formula and calculation
CAGR = ( (Ending value ÷ Starting value)^(1/years) − 1 ) × 100
It's the compound interest formula solved for the rate: what constant r makes Start × (1+r)^t equal End. Years can be fractional — 30 months is t = 2.5.
Step-by-step example
- Investment: ₹1,00,000 grew to ₹2,50,000 in 5 years.
- Ratio: 2,50,000 ÷ 1,00,000 = 2.5.
- Take the 5th root: 2.5^(1/5) = 2.5^0.2 = 1.2011.
- Subtract 1 and convert: CAGR = 20.11% per year.
- Check: 1,00,000 × (1.2011)^5 = ₹2,50,000 ✓
Why CAGR beats 'average return'
Arithmetic averages ignore compounding and volatility drag. A portfolio that gains 50% then loses 50% has an 'average return' of 0% — but you actually lost 25% (100 → 150 → 75). CAGR reports the truth: −13.4% per year. Whenever returns vary year to year, the arithmetic mean overstates reality; CAGR (the geometric mean) is the number your money actually experienced.
| Path | Yearly returns | Arithmetic avg | Final value | CAGR |
|---|---|---|---|---|
| Steady | +10%, +10%, +10% | 10% | ₹1,33,100 | 10.0% |
| Volatile | +40%, −20%, +10% | 10% | ₹1,23,200 | 7.2% |
| Wild | +70%, −40%, 0% | 10% | ₹1,02,000 | 0.7% |
CAGR vs XIRR vs absolute return
The most common investor error is quoting CAGR for a SIP. CAGR assumes one investment at the start; a SIP is 60–240 separate investments, each compounding for a different period. For any stream of cash flows, XIRR is the correct annualized measure — fund statements report it for exactly this reason.
| Measure | Handles | Use when |
|---|---|---|
| Absolute return | One lump sum, ignores time | Never for comparisons — 150% means nothing without the years |
| CAGR | One lump sum, annualized | Point-to-point growth: a stock, an index, a fund NAV, revenue |
| XIRR | Multiple dated cash flows | SIPs, portfolios with deposits/withdrawals — your real personal return |
Where CAGR misleads
- Endpoint sensitivity: CAGR measured trough-to-peak flatters, peak-to-trough condemns. A fund's 5-year CAGR from a 2020 crash bottom says more about the start date than the fund.
- It hides volatility: two funds with identical 12% CAGR can have wildly different drawdowns; check risk measures alongside.
- Short periods annualize noise: a 6-month +15% becomes a meaningless '32% CAGR'. Use CAGR for 3+ year windows.
- It says nothing about interim cash flows — dividends reinvested vs paid out change what 'ending value' should include (use total-return values).
Practical uses and benchmarks
- Compare funds and stocks across different holding periods on one scale.
- Evaluate a business: revenue or profit CAGR over 5–10 years is a standard due-diligence metric.
- Set planning assumptions: long-run CAGR of broad Indian equity indices has historically been ~11–13%; FDs 6–7.5%; gold ~8–9% (long horizons, INR terms — past performance guarantees nothing).
- Reverse-plan goals: needing ₹50 lakh from ₹20 lakh in 8 years implies a required CAGR of 12.1% — instantly telling you the asset mix the goal demands.
Frequently asked questions
Glossary
- CAGR
- Compound Annual Growth Rate — annualized point-to-point growth assuming smooth compounding.
- XIRR
- Annualized return computed from multiple dated cash flows — the right measure for SIPs and portfolios.
- Geometric mean
- The average that respects compounding; CAGR is the geometric mean of growth factors.
- Volatility drag
- The gap between arithmetic average returns and actual compound growth caused by fluctuation.
- Absolute return
- Total percentage change ignoring time — incomparable across different periods.
- Total return
- Price change plus dividends/interest reinvested — the correct basis for CAGR.
- Drawdown
- Peak-to-trough decline during the period — the risk CAGR hides.
- Rule of 72
- Doubling shortcut: years to double ≈ 72 ÷ CAGR.
Key takeaways
CAGR converts any start-to-end growth into a single annualized rate — the honest, comparison-ready measure of investment performance. Use it for lump sums over 3+ years with total-return values and fair endpoints; switch to XIRR the moment cash flows are involved; and always read it beside a risk measure, because two identical CAGRs can hide very different rides.
Enter your start value, end value and years above — then compute the CAGR you'd need for your next goal and see what it implies about where the money must sit.