What is CAGR?
Compound Annual Growth Rate or CAGR refers to the annual growth of an investment over a specific duration. The value of the investment is assumed to be compounded over the period. Unlike the absolute return, CAGR takes the time value of money into the account. As a result, it can reflect the actual returns of an investment generated over a year.
CAGR shows you how an investment grows in value over a period. In simple words, it shows you how much your investment has earned each year for a given time interval.
What is a CAGR Calculator?
The Compound Annual Growth rate (CAGR) calculator is a utility tool to calculate the compound annual growth rate of your investment over some time. You will have to enter the value of the initial investment, the expected final value of the investment and the number of years to calculate the CAGR.
The CAGR calculator has a formula box where you select the beginning and the ending value of the investment. You must also select the number of years of the investment. The CAGR calculator will show you the annual rate of growth of your investment. You can use CAGR to compare the return on investment against a benchmark.
How Does a CAGR Calculator Work?
The CAGR can be calculated using the following mathematical formula:
CAGR = [(Ending Value/Beginning Value) ^ (1/N)]-1 | |
| CAGR | Compound Annual Growth Rate |
| Beginning Value of the Investment | |
| Number of Years of Investment | |
| N | Number of Years of Investment |
The above formula depends on three variables, namely, the beginning value, the ending value, and the number of years (N).
When you enter the three variables, the CAGR calculator will give you the rate of return on the investment.
For example, the initial value of your investment is Rs 15,000, and the final value is Rs 25,000 in three years (N= 3 years).
CAGR is calculated as: CAGR = (25,000/15,000)^(⅓) – 1
CAGR = 18.56%.
You can also calculate the absolute return of the investment using the CAGR calculator:
End Value – Beginning Value/Beginning Value * 100
For the same example you have:
(25000 – 15000)/15000 * 100 = 66.66%
How to Use the ClearTax CAGR Calculator?
The ClearTax CAGR calculator is a simulation that helps you to calculate the compound annual growth rate of your investment. It allows you to decide if the investment yields a significant return over time.
- You must fill in the initial value of the investment.
- You then fill the final value of the investment and the number of years of the investment.
- The CAGR calculator shows you the Compound Annual Growth Rate.
You can also use the CAGR calculator to calculate the absolute return on the investment.
- You enter the beginning and the ending value of the investment.
- The CAGR calculator shows you the absolute rate of return on the investment.
Advantages of Using the ClearTax CAGR Calculator
You can use the ClearTax CAGR Calculator to make the right investment decisions. It helps you to determine the annual rate of return of your investments. You may compare the returns from the investment against a relevant benchmark and analyse your investment decisions.
- The ClearTax CAGR Calculator is a simple, easy to use utility tool. All you must do is to enter the initial and final values along with the period of the investment. The calculator will show you the compound annual growth rate.
- The CAGR calculator helps you to calculate the returns from your mutual fund investments. You can compare the mutual fund’s average annual growth rate overtime against a benchmark. It allows you to choose the mutual fund based on past returns.
- You can also compare the performance of stocks against the peers or the industry as a whole using the compound annual growth rate.
- You may use the CAGR to determine how the investments in your portfolio have performed over some time.
Limitations of CAGR
Even though CAGR is a useful concept, it has some limitations. The following are some of the weaknesses of CAGR calculators:
- In calculations related to CAGR, only the beginning and ending values are taken into account. It assumes that growth is constant over the duration of time and does not consider the aspect of volatility.
- It is suitable only for a lump-sum investment. In the case of SIP investments, the systematic investment at various time intervals is not considered as only the beginning value is taken into account for the calculation of CAGR.
- CAGR does not account for the inherent risk of an investment. When it comes to equity investment, risk-adjusted returns are more important than CAGR. You must use Sharpe’s Ratio and Treynor’s Ratio to determine the risk-return reward of the investment.
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Frequently Asked Questions
What is CAGR and how is it calculated?
CAGR or Compound Annual Growth Rate gives you the investments annual growth rate over some period of time. You may consider CAGR as a percentage-based metric, which helps you determine the annual rate at which your investment grows over a period of more than one year. You may use CAGR to determine the exact percentage of the returns from your investments each year, across the investment tenure.
CAGR Formula:
CAGR = [(Ending Value/Beginning Value) ^ (1/N)]-1
For example, the initial value of your investment is Rs 10,000, and the final value is Rs 15,000 in three years (N= 3 years). CAGR is calculated as:
CAGR = (15,000/10,000)^(⅓) – 1
CAGR = 14.47%.
What is CAGR return in mutual funds?
You may measure the performance of mutual funds using CAGR. You get to know the average annual growth of a mutual fund or even the decline, over a specific time period.
For example, you invested Rs one lakh in XYZ mutual fund in 2015. The NAV of XYZ mutual fund was Rs 20 and you got 5,000 units. You have redeemed all these units at the end of three years at a NAV of 25. Your mutual fund investment has a value of 5000 * 25 = Rs 1,25,000.
CAGR of mutual funds = (1,25,000/1,00,000) ^ (⅓) – 1 = 7.72%.
What is CAGR return in stocks?
You may use the Compound Annual Growth Rate or CAGR to determine the performance of your stock investments over a set period of time. You get an idea on how much your stocks have gained or lost each year.
For example, you have bought 200 shares of XYZ at Rs 100 in the year 2016. You have sold all the 200 shares in the year 2018 at Rs 150.
CAGR of stocks = (30,000/20,000) ^ (½) – 1 = 22.47%.
What is CAGR in banking?
CAGR or Compound Annual Growth Rate shows the actual return from an investment. However, CAGR is popularly used to gauge return from mutual funds and stocks and not so much for banking. You may consider annualised yield in banking instead of CAGR. It is the interest you receive in a year over the total investment you make.
What is the difference between XIRR and CAGR?
You may consider CAGR to be accurate when you make a one-time investment. However, you may invest in mutual funds through the systematic investment plan or the SIP.
You would find the earnings percentage to be different for each tenure of the investment and CAGR fails to show the accurate earnings percentage over cumulative investment tenures.
You may consider XIRR for multiple investments made with the same SIP over the investment tenure. In simple terms, XIRR is an aggregation of multiple CAGRs.
What is CAGR in economics?
CAGR shows you the mean annual growth rate of your investments over a period of time which is above one year. It is an accurate way to determine return on individual assets and investment portfolios, which may rise and fall over some time.
How to calculate the CAGR of a Company?
You can understand the calculation of CAGR with an example. Suppose you had invested Rs 1,00,000 in Company XYZ for 5 years. The valuation of the company rose and fell in the five year period.
You can understand the calculation of CAGR with an example. Suppose you had invested Rs 1,00,000 in Company XYZ for 5 years. The valuation of the company rose and fell in the five year period.
Suppose the valuation in the first year was Rs 75,000, the valuation in the second year was Rs 1,00,000, the valuation for the third year was Rs 1,50,000, the valuation for the fourth year was Rs 1,25,000 and the valuation for the fifth year was Rs 2,75,000.
You may calculate the CAGR of your investment in the Company as follows:
CAGR = (End Value)/(Beginning Value) (1/n)-1
CAGR (Compound Annual Growth Rate) = (2,75,000)/(75,000)^(⅕) – 1
CAGR = 29.67%.
You may consider CAGR of around 5%-10% in sales revenue to be good for a company. It is used to forecast the growth potential of a company. You may calculate CAGR for a company using the formula:
CAGR = 1+ ((Return on Investment)) ^ (365/Days) -1
Return on Investment = (Revenue – Costs)/(Costs)
What is the difference between absolute return and CAGR in a mutual fund?
You may consider an absolute return as the increase or decrease of an investment over a given time period, expressed in percentage terms.
You may calculate the absolute return for an investment using the following formula:
(End Value – Beginning Value) / (Beginning Value) * 100
For example, an investment of Rs 10,000 in May 2015 has appreciated to Rs 18,000 in May 2018. The absolute return is given as:
Absolute Return = (18,000 – 10,000) / (10,000) = 80%
You may consider CAGR to be an imaginary number which shows you the rate at which the investment would have grown. Using the above example:
CAGR = (End Value)/(Beginning Value) (1/n)-1
CAGR = (18000)/(10000) ^ (½) -1
CAGR = 34.16%.
What is a good CAGR for an industry?
You may consider CAGR of around 5%-10% in sales revenue to be good for a company. CAGR is used to forecast the growth potential of a company. For a Company with a track record of over five years, you may consider a CAGR of 10%-20% to be good for sales.
What is the difference between CAGR and annualised return?
You may consider an annualised return to be standardised return computed as a percentage per annum.
Annualised Return = (End Value – Beginning Value) / (Beginning Value) * 100 * (1/holding period of the investment)
Annualised return is an extrapolated return for the entire year. CAGR shows the average yearly growth of your investments.
What is the CAGR Ratio?
You may consider CAGR to be a geometric progression ratio. You may find CAGR to be a popular financial ratio which helps you compare the return from different investments.
The CAGR Ratio shows you which is the better investment by comparing returns over a time period. You may select the investment with the higher CAGR Ratio.
CAGR = (Ending Investment Value) / (Beginning Investment Value) ^ (1/n) -1
For example, an investment with a CAGR of 10% is better as compared to an investment with a CAGR of 8%. (All other parameters being equal).
What is the difference between CAGR and rolling returns?
Rolling returns give you the performance of investments across all time scales. It is the average annualised return for a time period. It measures returns from investments at different points in time eliminating the bias you may see from returns observed at a particular point in time. However, CAGR hides volatility by smoothening the performance of the investment.
How to calculate CAGR? How to calculate CAGR with a Calculator? How to interpret CAGR?
- You may calculate CAGR using the formula:
CAGR = (Ending Investment Value) / (Beginning Investment Value) ^ (1/n) -1
For example, you purchased mutual fund units at an NAV of Rs 11. You redeemed the investment at Rs 13.5 after 450 days. Let’s calculate the CAGR.
CAGR = (13.5) / (11) ^ (365/450) – 1
CAGR = 18.07%. - You may calculate CAGR using the ClearTax CAGR Calculator. You just enter the initial value of the investment and the final value of the investment. You then enter the duration or time period of the investment. The ClearTax CAGR Calculator shows you the CAGR of your investment.
- CAGR shows you the smoothened average annual return earned by your investment each year. It is a pro forma number which gives you an idea of investment yield on the annually compounded basis. CAGR shows you the geometric mean return of your investments over a time period, also accounting for compounding growth. In simple terms, an investment with a higher CAGR is better as compared to a lower CAGR. (All other parameters being equal)
How to calculate CAGR when one number is negative?
Yes, you may calculate CAGR even if one number is negative. You may consider the following example to get a better understanding. Take a look at the table below which shows the Year and the Revenue of Company XYZ.
| Year | Revenue (Rs) | Annual Growth Rate (%) |
|---|---|---|
| 2010 | 1000000 | |
| 2011 | 1200000 | 20 |
| 2012 | 1100000 | -8.333333333 |
| 2013 | 1500000 | 36.36363636 |
| 2014 | 1700000 | 13.33333333 |
| 2015 | 2200000 | 29.41176471 |
CAGR = (Ending Investment Value) / (Beginning Investment Value) ^ (1/n) -1
CAGR = (22,00,000)/(10,00,000)^(⅕) -1
CAGR = 17.08%.
How to calculate CAGR in excel?
You may calculate CAGR using the XIRR function in Excel. You could understand this with an example.
Suppose you invested in a mutual fund on 21 July 2012 at an NAV of Rs 10.26. You want to know the return on 02 January 2015 when the NAV was Rs 39.71. Here’s how to calculate CAGR using the XIRR function in Excel.
| Date | NAV |
|---|---|
| 21-Jul-12 | -10.26 |
| 02-Jan-15 | 39.71 |
| XIRR | 0.736593 |
You may choose the values and dates in the XIRR function.
How to calculate CAGR of a Company?
You may collect data on the sales revenue of a company from the balance sheet. You may consider the following example where you have the sales revenue of a company XYZ taken from the balance sheet.
| Year | Sales in Crores (Rs) |
|---|---|
| 2010 | 100 |
| 2011 | 110 |
| 2012 | 90 |
| 2013 | 120 |
| 2014 | 150 |
CAGR = (Ending Investment Value) / (Beginning Investment Value) ^ (1/n) -1
Ending Value = 150
Beginning Value = 100
Number of Years = 5
CAGR = 8.44%
How to calculate CAGR Online?
You may calculate CAGR online using the ClearTax CAGR Calculator.
- You may consider entering the initial value and the final value of your investment.
- You then fill up the number of years of investment.
- The ClearTax CAGR Calculator shows you the compound annual growth rate or CAGR.
What is CAGR in SIP? How to calculate CAGR for SIP in Excel?
You may consider calculating the CAGR of your SIP investments in mutual funds.
You may find XIRR accounting for multiple investments in the same SIP across a particular tenure. It treats multiple SIPs as the same investment.
Let us understand CAGR in SIP with an example. Suppose you start an SIP in a mutual fund scheme at Rs 500 for 12 months. You have received Rs 6,500 at maturity.
You may consider CAGR to be 15.67%.
When to use CAGR?
You may use CAGR to gauge the performance of different mutual funds to determine the earning potential. CAGR may consider the investment tenure giving you an accurate picture of the earnings from your mutual funds.
You may use CAGR to compare the historical returns of bonds, stocks or mutual funds. It helps you gauge the returns from your investments over the entire investment tenure.
Why is CAGR used?
CAGR eliminates the effects of volatility on periodic investments. You may use CAGR to determine the performance of an investment over a time period of around three to five years. CAGR shows the geometric mean return while also accounting for compound growth. CAGR helps you calculate the internal rate of return of your investments.
How to convert absolute return to CAGR?
You don’t consider the investment tenure when determining the absolute return. You would only consider the initial investment and the final amount. For example, if you invested Rs 1,000 in the past and today the value of the investment is Rs 1,500 then you have earned an absolute return of 50%.
Absolute Return = (1500-1000)/1000 * 100 = 50%
You may consider the investment tenure when calculating CAGR. Taking the same example, suppose you have an investment tenure of two years.
CAGR = (Ending Investment Value) / (Beginning Investment Value) ^ (1/n) -1
CAGR = (1500) / (1000) ^ (½) – 1
CAGR = 22.47%.
Which is better IRR or CAGR?
You may consider IRR and CAGR for different purposes. CAGR shows you the return from your investment over a time period. However, you could use IRR to determine the return from complicated projects and investments with different cash inflows and outflows.
IRR and CAGR are the same when you make a lump sum investment. However, they would differ when you make multiple investments and you have variable annual returns. In a nutshell, you may use IRR to determine the return from your investments with multiple cash flows.
Why does the ClearTax CAGR Calculator show both the absolute return and the CAGR?
The absolute return shows how much the investment has grown over the entire period. However, absolute return does not show you the true growth of the investment. You must calculate the CAGR, which shows the annual growth rate of the investment over a while. Use the ClearTax CAGR Calculator to calculate the true value of your investments.
Can you use the ClearTax CAGR Calculator to calculate the return from mutual funds?
Use the ClearTax CAGR Calculator to check the annual growth rate of your mutual fund investments. You can compare the performance of the mutual funds with its peers or even a benchmark. You get an idea of whether you must invest in the mutual fund to get the return you desire.
Does the ClearTax CAGR Calculator also show the IRR?
No, the ClearTax CAGR Calculator does not show you the IRR on the investment. Both the CAGR and the IRR show you the return on investment. However, CAGR has only an initial investment and a final investment or cash flow. IRR has multiple investments over some time.
Can you use the ClearTax CAGR Calculator to determine the value of SIP investments?
If your investment stretches over some time with irregular instalments, it gets difficult to determine the compound annual growth rate or CAGR. It is better to use the ClearTax SIP calculator to calculate the value of the SIP investments.
Why should you use the ClearTax CAGR Calculator to calculate the return on your investment?
Well, you get a birds-eye view on the return from your investment. You may compare two different investments that are held over different periods. You must use the CAGR calculator for investments with a time-frame of over one year.
