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Financial Term Dictionary

What is CAGR?

Published on July 05, 2026 • Last updated July 05, 2026

Formula Included

Definition

Compound Annual Growth Rate (CAGR) is the geometric progression ratio that provides a constant rate of return over a specified time period.

Detailed Explanation

CAGR represents the smoothed annual rate at which an investment would have grown if it had grown at a steady rate over the investment period. It is useful for comparing the returns of different assets (e.g., mutual funds vs gold vs FDs) over multiple years, smoothing out market volatility.

Mathematical Formula

$$CAGR = \left(\frac{EV}{BV}\right)^{\frac{1}{n}} - 1$$

Calculation Examples

If you invest $5,000 in a fund and its value grows to $10,000 in 5 years: - Beginning Value (BV) = $5,000 - Ending Value (EV) = $10,000 - Number of years (n) = 5 - CAGR = (10,000 / 5,000)^(1/5) - 1 = (2)^0.2 - 1 = 14.87% per annum

Frequently Asked Questions

No. CAGR is a representative figure. It assumes the investment grew at a constant rate, smoothing out any volatility and year-on-year fluctuations in real market conditions.

CAGR only considers the start and end values, ignoring what happens in between (interim risk or volatility). It is also not suitable for investments with periodic additions (like SIPs) where XIRR (Extended Internal Rate of Return) is preferred.

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