What is CAGR?
The compound annual growth rate (CAGR) is the steady annual rate that takes a starting value to an ending value. It is the single most useful number for comparing returns over different periods.
The idea
CAGR answers a simple question: if the value had grown at exactly the same rate every year, what rate would that have been? Real returns jump around year to year, but for comparison it is useful to smooth them into one number.
The formula
CAGR = (Ending Value / Starting Value) ^ (1 / Years) − 1
The exponent 1 / Years is the geometric average. This is what makes CAGR honest about compounding — a simple arithmetic average of yearly returns would overstate the result.
Worked example
₹1 lakh becomes ₹4 lakh in 6 years. The total return is 300%, but spread evenly the rate is much smaller:
CAGR = (4 / 1) ^ (1 / 6) − 1
= 1.2599 − 1
= 25.99% per yearWhere CAGR is the wrong tool
- If money was added or withdrawn during the period, CAGR is meaningless — use IRR instead.
- For very short periods, annualizing can be misleading: 10% in one month does not really mean 213% a year.
- CAGR hides the path. Two investments with the same CAGR can have very different drawdowns.
Mental shortcuts
CAGR is closely tied to doubling time: at any rate, doubling takes roughly 72 / rate years. A 12% CAGR doubles money in about 6 years; a 7.2% CAGR doubles it in about 10.