How CAGR is calculated
CAGR = (Final ÷ Initial)^(1 ÷ years) − 1. An investment growing from 10,000 to 25,000 over 8 years has a CAGR of about 12.1%, regardless of how turbulent the actual journey was.
Because it annualizes, CAGR compares a three-year holding against a ten-year one fairly. Absolute returns cannot: 150% over 8 years sounds larger than 40% over 2 years, but the second is the stronger annual performer.
What CAGR hides
It says nothing about volatility. Two funds can share a 12% CAGR while one glided smoothly and the other halved twice along the way. It also ignores cash flows, so if you added or withdrew money during the period you need XIRR instead.
For context, broad equity indices have delivered roughly 10 to 12% CAGR over multi-decade periods in India and 7 to 10% in the US. Any pitch promising a sustained CAGR far above those deserves scrutiny.
Frequently asked questions
What is the difference between CAGR and absolute return?
Absolute return is total growth over the whole period. CAGR converts that into a steady per-year rate so investments of different durations can be compared.
When should I use XIRR instead?
Use CAGR for a single lump sum with no additions or withdrawals. Use XIRR whenever money moved in or out during the period, such as monthly SIPs.
Can CAGR be negative?
Yes. If the final value is below the initial value, CAGR is negative, meaning the investment shrank at that steady annual rate.
Does CAGR include dividends?
Only if your final value includes them. For a fair picture use total value including reinvested dividends, not just price.
Is a higher CAGR always better?
Not alone. A higher CAGR earned through extreme volatility or leverage may be worse risk-adjusted than a steadier, slightly lower one.
What is a good CAGR?
Context decides. Beating inflation by five or more percentage points over a decade is strong. For equities, a sustained 12% over ten years is excellent.