CAGR

27.23 %

CAGR stands for Compound Annual Growth Rate. It is a measure of the annual growth rate of an investment over a specified time period, taking into account the effect of compounding. In simple terms, CAGR is the average year-on-year growth rate of an investment over a specific number of years. As Albert Einstein famously said, “he who understands compound interest, earns it; he who doesn't, pays it.”

CAGR is also used to measure the annual growth rate of any financial metric (sales, profit, revenue, etc.)

- CAGR represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
- Unlike other metrics, CAGR shows how an investment grows by assuming you reinvest any earnings each year, making the investment increase over time (compound).
- CAGR matters because it gives you a clear, annualised rate of return on any investment, ignoring the volatility and fluctuations that might have occurred along the way.
- It's a useful metric for comparing the performance of different investments over the same period. For example, if you're choosing between two stocks or between a stock and a bond, calculating the CAGR for each over the same number of years can help you see which investment has truly performed better on an annual basis.

Here’s a simple formula to calculate CAGR:

From the above formula,

- V initial = beginning value
- V final = final value
- t = time in years

CAGR is calculated by dividing the final value by the initial or beginning value, raising it to the inverse number of the compounding period (t), and then subtracting 1.

For example, suppose you invested ₹1,000 in a stock. After 5 years, your investment has grown to ₹1,610. To calculate the CAGR to understand the average annual growth rate of your investment over these 5 years.

Plugging the numbers from our example into this formula:

- Initial Value = ₹1,000
- Final Value = ₹1,610
- Number of Years = 5

CAGR = ( 1000 / 1610 )^{⅕} - 1 x 100 = 10%.

Therefore, the compounded annual growth rate of your stock investment over the 5 years is 10%.

According to Investopedia, "CAGR is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year."

Understanding CAGR is crucial for investors who aim to accurately measure the performance of their investments in mutual funds or stocks over time. Whether you're a seasoned investor or just starting out, learning to calculate the CAGR on your investments can provide valuable insights into your financial growth.

In the table shown above, we have taken the sales of a company for 8 years, where the Ending Value is 1800 and the Beginning Value is 1000. We assumed n-1 number of years since growth from Rs X to Rs 1000 could not be calculated or assumed in Year 1. We place the given data in the formula, and we get a CAGR of 7.62%.

Step 1: Please enter the amount you have invested (in ₹).

Step 2: Input the final investment amount (in ₹).

Step 3: Enter the duration of your investment (in years).

The calculator does its magic and instantly delivers the CAGR of your investment!

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