{"id":3874,"date":"2021-08-12T16:59:55","date_gmt":"2021-08-12T11:29:55","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=3874"},"modified":"2022-05-25T18:27:18","modified_gmt":"2022-05-25T12:57:18","slug":"compound-annual-growth-rate","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/","title":{"rendered":"CAGR \u2013 2022 Guide on What Is It, How To Calculate, Uses and Limitations"},"content":{"rendered":"\n<p>When you look at the returns offered by a <a href=\"https:\/\/www.tickertape.in\/blog\/types-of-mutual-funds-a-quick-overview\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> scheme or any investment you make, you would often come across the word CAGR as a measure of the value of your earnings. Have you ever wondered what actually is CAGR meaning and how it is calculated? What is its relevance to the investment universe? Let\u2019s deep-dive.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#What-is-CAGR\" title=\"What is CAGR?\">What is CAGR?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#How-is-CAGR-calculated\" title=\"How is CAGR calculated?\">How is CAGR calculated?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#Uses-of-CAGR\" title=\"Uses of CAGR\">Uses of CAGR<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#Comparing-unrelated-investment-avenues\" title=\"Comparing unrelated investment avenues\">Comparing unrelated investment avenues<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#Comparing-mutual-fund-schemes\" title=\"Comparing mutual fund schemes\">Comparing mutual fund schemes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#For-making-investment-decisions\" title=\"For making investment decisions\">For making investment decisions<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/compound-annual-growth-rate\/#Limitations-of-CAGR\" title=\"Limitations of CAGR\">Limitations of CAGR<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-CAGR\"><\/span><strong>What is CAGR?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The <a href=\"https:\/\/www.tickertape.in\/blog\/difference-between-xirr-and-cagr\/?utm_source=blog&amp;utm_medium=article\">CAGR<\/a> meaning, in simple terms, is the average annual return yielded by an investment over a given period of time. The important point here is that it is an average of the returns. Your investment may yield different returns over different periods, reacting to market fluctuations and movements. There may be times when your investment, let\u2019s say in stocks, may even give you negative returns during market slumps, but may make you very happy with the performance during bull markets. How do you assess if the investment is actually benefiting your portfolio or not? Herein lies the significance of CAGR.<\/p>\n\n\n\n<p>What CAGR does is that it smoothens out the returns over the specific period of your assessment to help you understand the worth of the investment.&nbsp;<\/p>\n\n\n\n<p>For example, if a <a href=\"https:\/\/www.tickertape.in\/blog\/invest-in-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> scheme is launched with a NAV of Rs 10 and, after a year the NAV becomes Rs 12, the return offered by the scheme is 20%. Now, in the second year, if the NAV grows to Rs 14, while in absolute terms, your NAV has risen by Rs 2 just like in the previous period, but the return would be 16.66% here. The CAGR gives the compounded annual <a href=\"https:\/\/www.tickertape.in\/blog\/rate-of-return\/\">rate of return<\/a> on the investment and smoothes out the differentiated yield rates.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-is-CAGR-calculated\"><\/span><strong>How is CAGR calculated?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The formula for calculating CAGR is as follows:<\/p>\n\n\n\n<p><strong>CAGR = [{(End value \/ Starting value) ^ 1\/N} &#8211; 1] * 100<\/strong><\/p>\n\n\n\n<p>\u2018N\u2019 in the above formula is the number of years over which the value has grown.<\/p>\n\n\n\n<p>If you put the CAGR formula in the above-mentioned example, the CAGR would be calculated as follows:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td>End value<\/td><td>Rs 14<\/td><\/tr><tr><td>Starting value<\/td><td>Rs 10<\/td><\/tr><tr><td>Time period<\/td><td>2 yrs<\/td><\/tr><tr><td>CAGR&nbsp;<\/td><td>[(14\/10) ^ \u00bd &#8211; 1] * 100= 18.32%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>So, though the interest rates in the first and second years were different, the CAGR gives the average annualized rate of 18.32% and helps you assess the average returns earned by the investment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"uses\"><span class=\"ez-toc-section\" id=\"Uses-of-CAGR\"><\/span><strong>Uses of CAGR<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>CAGR is an extremely useful tool in assessing the return-yielding potential of market-linked investment avenues, whose returns vary due to <a href=\"https:\/\/www.tickertape.in\/blog\/strategies-to-tackle-volatility\/\">market volatility<\/a>. Here are some of the uses of CAGR:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Comparing-unrelated-investment-avenues\"><\/span><strong>Comparing unrelated investment avenues<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When you have a limited amount to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a>, you often wonder which avenue would give the best returns on your investments. CAGR can come to your aid here. CAGR gives you the annualized returns of different avenues, unrelated to each other. Thus, by checking the CAGR of different instruments you can pick one which has given the best returns and choose to invest in it if it meets your risk profile.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Comparing-mutual-fund-schemes\"><\/span><strong>Comparing mutual fund schemes<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When comparing similar <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">mutual fund<\/a> schemes, checking their past returns gives you an idea of how the scheme has performed over the years. Comparing across different time periods may give you different figures to work with that may be confusing. CAGR helps you narrow down your results so that you can check the historic returns of the scheme and consider investing in one which has given the highest returns.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"For-making-investment-decisions\"><\/span><strong>For making investment decisions<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The CAGR formula can be used in two additional ways. If you need a specific corpus for a financial goal, you can use the CAGR formula to find out the minimum rate of return that you need to earn on your investment to create the desired corpus.<\/p>\n\n\n\n<p>For example, say you have Rs 5 lakh to invest and you need a corpus of Rs 50 lakh after 10 yrs for funding the college education of your child. You can use the CAGR formula to find the rate of return which is a must on your investment of Rs 5 lakh to grow to Rs 50 lakh in 10 yrs. If you put the values in the CAGR formula, the rate could be calculated as follows:<\/p>\n\n\n\n<p><strong>Rate of return = [{(50 lakh \/ 5 lakh) ^ 1\/10} &#8211; 1] * 100<\/strong><\/p>\n\n\n\n<p><strong>= 25.89%<\/strong><\/p>\n\n\n\n<p>So, you need an avenue that gives a minimum annualized return of 25.89% to grow the corpus amount to Rs 50 lakh.<\/p>\n\n\n\n<p>Alternatively, if you know the rate of return and the required corpus, you can find out how much investment would be needed to attain the corpus after a specified time period. So, in the above example, if the rate of return is 25.89%, the corpus is Rs 50 lakh and the time period is 10 yrs, you can back-calculate to find the required investment amount to be Rs 5 lakh.<\/p>\n\n\n<span class='bctt-click-to-tweet'><span class='bctt-ctt-text'><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fcompound-annual-growth-rate%2F&#038;text=Compound%20Annual%20Growth%20Rate%20gives%20you%20the%20annualized%20returns%20of%20different%20avenues%2C%20unrelated%20to%20each%20other.&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank'rel=\"noopener noreferrer\">Compound Annual Growth Rate gives you the annualized returns of different avenues, unrelated to each other. <\/a><\/span><a href='https:\/\/twitter.com\/intent\/tweet?url=https%3A%2F%2Fwww.tickertape.in%2Fblog%2Fcompound-annual-growth-rate%2F&#038;text=Compound%20Annual%20Growth%20Rate%20gives%20you%20the%20annualized%20returns%20of%20different%20avenues%2C%20unrelated%20to%20each%20other.&#038;via=TickertapeIN&#038;related=TickertapeIN' target='_blank' class='bctt-ctt-btn'rel=\"noopener noreferrer\">Click To Tweet<\/a><\/span>\n\n\n<h2 class=\"wp-block-heading\" id=\"limitations\"><span class=\"ez-toc-section\" id=\"Limitations-of-CAGR\"><\/span><strong>Limitations of CAGR<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Though CAGR is useful in selecting an investment scheme, it has its limitations. These limitations include:<\/p>\n\n\n\n<p>CAGR smoothens out the <a href=\"https:\/\/www.tickertape.in\/blog\/volatility\/\">volatility<\/a> risks associated with investments. Some years, the markets might give negative returns but when the returns are averaged out, this volatility is not highlighted and you don\u2019t get the true picture of the y-o-y returns.<\/p>\n\n\n\n<p>In the case of periodic investments and withdrawals from the scheme, CAGR might not give the right rate of return since it does not account for inflows and outflows. It is, thus, suitable for assessing returns on a lump sum investment.<\/p>\n\n\n\n<p>CAGR does not give the risk-adjusted returns from <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> investments, which is crucial in determining whether the investment is suitable at a given risk level or not.<\/p>\n\n\n\n<p>To assess the suitability of investments, you need to understand what is CAGR. When you know what CAGR means and how it works, you can compare and pick the right investment avenues. However, do remember the limitations that are inherent to CAGR and keep them in mind when using the parameter to judge between different investments. Be an informed investor and invest in different schemes offering the best returns on your investment.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>CAGR is the average annual return yielded by an investment over a given period of time. Click here to learn more about compound annual growth rate, its uses and calculation<\/p>\n","protected":false},"author":45,"featured_media":3878,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9],"tags":[512,513,515,514],"acf":[],"modified_by":"Neera Bhardwaj","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/08\/Informative-2-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3874"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/45"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=3874"}],"version-history":[{"count":8,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3874\/revisions"}],"predecessor-version":[{"id":8823,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3874\/revisions\/8823"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/3878"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=3874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=3874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=3874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}