|1Y||Rs 10,000||Rs 2,457||Rs 12,457|
|2Y||-||Rs 5,518||Rs 15,518|
|3Y||-||Rs 9,332||Rs 19,332|
|4Y||-||Rs 14,082||Rs 24,082|
|5Y||-||Rs 20,000||Rs 30,000|
Compound Annual Growth Rate (CAGR) is a measure of the average yearly growth of your investments over a certain time period. It tells you the average rate of return you have earned on your investments every year. CAGR is very useful for investors because it is an accurate measure of investment growth (or fall) over time.
Many people look at their investment returns in absolute terms. Absolute returns tell you how much your investment has earned over the entire duration. Let us take a hypothetical example. Imagine that you have invested ₹20,000 in a mutual fund in 2015. The value of the investment is ₹35,000 in 2020.
In absolute terms, you have earned a 75% return on your investment over a five-year period. While this sounds very good, it does not give you the full picture. In other words, you do not know the average rate of return you have earned on your investment every year.
As an investor, it is important to know how well your investments have performed on an average year on year. CAGR can be very helpful in such a situation.
Now that you have a basic idea about Compound Annual Growth Rate and its importance, let’s delve deeper and understand how to calculate CAGR.
We will start with the CAGR formula. The Compound Annual Growth Rate or CAGR formula for calculating investments is:
CAGR = (Ending balance/beginning balance)1/n - 1
Let's understand this with an example.
CAGR = (35000/20000)1/5 - 1 OR CAGR = 11.84%
This means, your investment in the mutual fund has given you an average return of 11.84% every year.
There are multiple benefits of using CAGR calculator. Let's look at them one by one and understand how you can use the online CAGR calculator to make informed investment decisions.
To evaluate growth of an investment or business over time - Unlike in absolute returns, CAGR calculation takes into account the element of time. So CAGR works as a more precise indicator of growth over time. Whether you have your own business or you have invested in some financial product, you can look at CAGR to find out how your money has grown every year over a certain period.
To compare performance of multiple investment products - CAGR formula can be used to compare multiple investment products more accurately than absolute returns. Thus, CAGR calculator as a tool can come handy for investment comparison.
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