CAGR

What is CAGR?

The Compound Annual Growth Rate (CAGR) shows the average annual growth of an investment over a specific period, assuming profits are reinvested. It smooths out year-to-year fluctuations, making it easier to compare different investments.

CAGR Formula

The formula for calculating CAGR is:
CAGR = [(Ending Value/Beginning Value)^1/n] − 1

Ending Value: Final investment amount
Beginning Value: Initial investment amount
n: Number of years the investment is held

Why is CAGR useful?

• Simple Overview: It provides one clear growth rate instead of multiple annual returns.
• Shows Compounding: Reflects how investments grow when earnings are reinvested.
• Easy Comparison: Helps compare investments with different timeframes or cash flows.

CAGR Example

If you invest ₹10,000, and it grows to ₹15,000 in 5 years:

CAGR= [(15000/10000)^1/5 − 1 = (1.5)^0.2] − 1 ≈ 0.08447 or 8.45%

This means your investment grew, on average, by 8.45% per year.

Key Benefits of CAGR

• Performance Tracking: Measures how well investments have performed.
  Realistic Expectations: Gives an idea of future returns based on past growth.
• Investment Decisions: Helps analysts assess growth potential in companies or sectors.

CAGR Limitations

• Ignores Volatility: Doesn’t show ups and downs during the period.
  Long-Term Focus: May miss short-term trends or market changes.
• Assumes Reinvestment: Assumes all profits are reinvested, which might not always happen.