Key points
- CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1.
- ₹1 lakh growing to ₹2.5 lakh in 7 years is a 150% absolute return but a 14% CAGR.
- CAGR is right for a single investment with no additions or withdrawals.
- For SIPs and irregular cash flows, use XIRR.
What CAGR means
Compound annual growth rate (CAGR) answers one question: at what steady yearly rate would the starting amount have grown to the ending amount over this period? It ignores the ups and downs in between and turns any journey into a single, comparable yearly figure.
Formula: CAGR = (Ending value ÷ Beginning value)^(1 ÷ number of years) − 1.
Example
You invested ₹1,00,000 and it is worth ₹2,50,000 after 7 years. CAGR = (2,50,000 ÷ 1,00,000)^(1/7) − 1 = 2.5^0.1429 − 1 ≈ 13.99% a year.
The absolute return is (2,50,000 − 1,00,000) ÷ 1,00,000 = 150%, which sounds much bigger but says nothing about how long it took. 150% over 3 years would be a 35.7% CAGR; over 15 years, only 6.3%.
CAGR, absolute return and XIRR compared
| Measure | What it tells you | Use it for |
|---|---|---|
| Absolute return | Total % gain, ignoring time | Holdings of under a year |
| CAGR | Steady yearly growth rate | A single lumpsum held for several years; comparing funds’ trailing returns |
| XIRR | Yearly return accounting for the date and size of every cash flow | SIPs, top-ups, partial withdrawals, stock portfolios bought over time |
Why a SIP needs XIRR
In a SIP, the first instalment is invested for the whole period and the last for only a month. Dividing the final value by the total invested and applying the CAGR formula over the full period badly understates the return. XIRR solves for the single annual rate that, applied to each instalment for its own time invested, produces the final value. Spreadsheets compute it with =XIRR(values, dates), with investments entered as negative numbers and the current value as positive.
The rule of 72
A quick companion to CAGR: divide 72 by the annual rate to estimate how many years it takes money to double. At 12%, money doubles in about 6 years; at 8%, about 9 years; at 6%, about 12 years.
A fund’s CAGR is not your return
Fund factsheets show trailing CAGRs — for example, a 5-year return of 14% means a lumpsum invested exactly five years ago grew at 14% a year. If you invested through a SIP, or bought at a different time, your own return will be different. Your fund house or registrar statement shows your personal XIRR.
Trailing returns also change every day as the start and end dates move. A fund that looks excellent over five years may look ordinary over three, depending on where the market was at each end. Compare funds over the same periods and over several periods.
CAGR for businesses and markets
CAGR is also used for sales, profits and populations. A company whose revenue grew from ₹100 crore to ₹180 crore in four years grew at a CAGR of about 15.8%, even if one of those years was flat. Because it hides volatility, look at the year-by-year figures too before drawing conclusions.
Frequently asked questions
Can CAGR be negative?
Yes. If the ending value is below the starting value, CAGR is negative. ₹1 lakh falling to ₹80,000 over 3 years is a CAGR of about −7.2%.
What is a good CAGR?
It depends on the asset and the risk. Deposits in India have typically offered 6%–7.5%; diversified equity has historically averaged more over long periods, with large swings. Compare a CAGR with inflation and with a suitable benchmark, not in isolation.
How do I calculate CAGR in Excel?
Use =(End/Start)^(1/Years)-1, or =RRI(Years, Start, End). For irregular cash flows use =XIRR(values, dates).