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Mutual Funds
CAGR: The true measure of your investment growth
You may have come across several financial terms, but none are as important or misunderstood as CAGR. So, what is CAGR, and why is everyone talking about it?
Understanding CAGR
CAGR stands for Compound Annual Growth Rate. In simple terms, it can be defined as the rate at which your money would have grown every year if it had grown steadily, compounded annually, from the start of your investment till the end. It gives a clearer, apples-to-apples comparison for all your investment options.
How to calculate CAGR?
Let’s say you invested in a mutual fund in May 2020, when the NAV was Rs 100. By May 2025, the NAV has grown to Rs 180.
You held the investment for 5 years. To find the CAGR, you use this formula:
CAGR = [[(End Value/Start Value) ^ (1/No. of Years)] – 1] x 100
So in our case:
CAGR = [(180 / 100) ^ (1 / 5)] – 1
= (1.8) ^ (0.2) - 1
≈ 1.1257 - 1
≈ 0.1257 or 12.57%
What this means?
Even if the NAV moved up and down each year, your investment grew at an average rate of 12.57% per year, compounded annually, over 5 years. CAGR is useful tool to compare returns across different investments over the same time frame.
Why is CAGR important?
When you put money into an investment, you naturally want to know how fast it has grown each year on average – that’s exactly what CAGR tells you. Instead of getting lost in the wild highs and lows, CAGR smooths out those swings to give you one clear, straight‑line growth rate per annum.
This makes it easy for you to compare different investments side by side and choose the one that fits your goals. Even if one year shot up and another dipped, CAGR cuts through the noise so you know the real story of your money’s performance.
Conclusion
In a nutshell, CAGR is much like your investment’s report card, showing how well it truly performed, removing the guesswork. Yet, while CAGR gives an average yearly rate, actual returns can still be volatile. Always look at past performance, future goals, and risk appetite.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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