🚀 What Is CAGR?

The short term for Compound Annual Growth Rate is  CAGR

CAGR tells you how much your investment grew each year on average, assuming the growth was steady and compounded annually.

Think of it like this:
If you invested ₹10,000 and it became ₹20,000 in 5 years, CAGR answers the question:
“If my money grew at the same rate every year, what would that rate be?”

🧠 Why It’s Useful

• Smooths out ups and downs: Markets fluctuate, but CAGR gives you a clean, average growth rate.
• Makes comparisons easy: You can compare different investments over time, even if one had wild swings and the other was steady.

📊 The Formula

Here’s the math behind it:

CAGR ={(Final Investment Value /Initial Investment) (1/Tenure)}-1

Where:

• Ending Value = how much your investment is worth now
• Beginning Value = how much you started with
• n = number of years

🧪 Example for You

Let’s say you invested ₹1,00,000 in a mutual fund scheme, and after 3 years it’s worth ₹1.4 lakhs after 3 years

Using the formula:

CAGR ={(1.4 /1)(1 /3)}-1 =11.9%

CAGR={(Final Investment Value /Initial Investment)(1 /Tenure)} -1

 

The longer your investment tenure, the higher the power of compounding and wealth creation. Over long investment tenures, compounding has the power to multiply your investments.

How is CAGR used in Mutual Funds?

All mutual fund performance data for periods exceeding one year is presented as Compound Annual Growth Rate (CAGR). Asset Management Companies (AMCs) consistently disclose 1-year, 3-year, 5-year, and since inception CAGRs of their schemes in their monthly fund factsheets. It’s crucial to understand that CAGR is relevant only for point-to-point returns and should not be applied to Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), or Systematic Withdrawal Plans (SWPs). However, CAGR is a powerful tool for assessing the overall performance of a fund. Use it to effectively compare the CAGRs of different mutual fund schemes and make well-informed investment decisions.