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If you invest in stocks or mutual funds, you must have come across the term ‘CAGR’, haven’t you? If you are not sure about what CAGR stands for or why this is crucial to know for evaluating any investment option, then here are the details related to CAGR that you need to know.
What is CAGR?
Compound Annual Growth Rate or CAGR is a metric that helps measure the average annual growth of your investments over a tenure. This metric gives you the average rate of return over a year usually. For calculating CAGR, it is assumed that all profits generated are reinvested at the end of each year of the tenure chosen. This is why CAGR is regarded as a representative metric for the annual growth rate of your investment. You can use the CAGR Calculator to find out the potential return of your investments and also compare it against other investment options.
How to calculate CAGR?
For finding out the CAGR of your investment, you need to follow the steps given below –
- Firstly, you have to take the value of your investments – the initial value (PV) and the end value of the investment (FV). Then divide the end value of the investment by the initial value of the investment.
- Now you have to increase the number you have found out to the power of 1 divided by the number of years (tenure of the investment) (n).
- Now you have to subtract 1 from the figure you got in the last step and then you derive the CAGR.
Thus, the formula for CAGR is –
CAGR = (FV/PV)^1/n -1
Suppose you invested Rs. 100000 in 2012 and today the value of your investment is Rs. 250000. So the CAGR would be –
CAGR = (250000/100000)^1/10 -1
= 1.096 -1
= 0.096 or 9.5%
This 9.5% is the average annual return that you have earned over the last ten years. The absolute return is different from CAGR and it can be calculated as –
Absolute return = (250000-100000)/100000*100 = 150%.
You can find out both CAGR and absolute return on your investment using the CAGR calculator.
Why CAGR is so important for an investor?
When you are investing in any asset class, identifying the return it can give you is crucial. After all, investments are done for earning a return and accumulating wealth, isn’t it? Finding out CAGR can help in multiple ways which include the following –
- You can use this metric as a representation of the return of investment in scenarios.
- Calculating CAGR is quite easy and you easily find it using the initial value and the final value of the investment and the tenure of the investment.
- CAGR helps you understand the overall performance of your investment over the years you stay invested.
- You can use the CAGR to find out how well your investments are performing against other investment instruments, funds, and asset classes.
What is a CAGR Calculator?
CAGR Calculator is a tool to calculate the returns on your investment. It is similar to a mutual fund calculator where you have to enter the amount you invest, and the amount you want to accumulate, to find out the expected rate of return for your investment.
This calculator helps in comparing different assets, and mutual funds and helps you select the best fund that will suit your portfolio. It is easy to use and gives the result within the blink of an eye.
Things to consider about CAGR
While CAGR is a great metric to understand how well your investments are performing or to compare them, you need to keep in mind certain factors while using this CAGR Calculator –
- CAGR measures the average rate of return without considering any risk involved in the investment. So, this metric doesn’t reflect any risk of the investment.
- Also while calculating the CAGR, you need to use the same periods. If you are calculating tenure in years, then ‘n’ will be in years only and if in months, then it will be in months only.
So, if you want to find out the return your investment has been offering you over time, you can use CAGR and get the average annual rate of return of your investment. You can also use the CAGR calculator to find out the absolute return of your investment.