Introduction
Imagine you invested ₹1 lakh in a mutual fund. After 5 years, it grew to ₹1.9 lakhs. Your friend says, “Wow, you made 90% returns!” But is that the full story?
Not really. Absolute returns (90%) don’t tell you how much your money grew each year. That’s where CAGR (Compound Annual Growth Rate) comes in—it smooths out your returns to show an annualized growth rate, making comparisons easier.
This guide will explain:
✔ What is CAGR & why it’s better than absolute returns
✔ How to calculate it (with real Indian examples)
✔ Where it’s useful (and where it’s misleading)
✔ How investors like you can use it wisely
Section 1: Why CAGR Matters in India
Most Indian investors look at total returns (e.g., “This stock doubled in 5 years!”), but this can be deceptive.
- Problem: A 100% return over 10 years is very different from 100% in 2 years.
- Solution: CAGR gives the annualized growth rate, helping you compare investments fairly.
Example:
- FD: ₹1 lakh → ₹1.5 lakhs in 5 years (50% absolute return).
- Equity MF: ₹1 lakh → ₹2 lakhs in 5 years (100% absolute return).
- CAGR tells you: FD grew at 8.4% annually, MF at 14.9% annually—a clearer comparison.
Section 2: Mindset Shift – CAGR is Like Your Investment’s “Speedometer”
Think of CAGR as the average speed of your investment journey:
- Absolute return = Total distance traveled (Delhi to Mumbai).
- CAGR = Average speed (km/h) – Helps compare different routes.
Key Insight: A high CAGR means your money grew faster consistently, not just in a lucky year.
Section 3: How to Calculate CAGR (Formula & Example)
CAGR Formula:
CAGR=(Final ValueInitial Value)1Years−1CAGR=(Initial ValueFinal Value)Years1−1
Example:
- You invested ₹50,000 in a stock.
- After 4 years, it’s worth ₹1,00,000.
- Calculation:CAGR=(1,00,00050,000)14−1CAGR=(50,0001,00,000)41−1=20.25−1=20.25−1≈1.189−1=0.189≈1.189−1=0.189
Interpretation: Your investment grew at ~18.9% per year on average.
Section 4: Where CAGR is Useful (And Where It’s Not)
✅ Best For:
✔ Comparing different investments (FD vs. mutual funds vs. stocks).
✔ Measuring long-term growth (5+ years).
✔ Evaluating consistent performers (e.g., blue-chip stocks).
❌ Misleading For:
✖ Volatile investments (e.g., crypto, small-cap stocks—CAGR hides ups & downs).
✖ Short-term returns (use absolute returns for <1 year).
Section 5: Real-Life Example – Priya’s Mutual Fund Investment
Priya invested ₹2 lakhs in a flexi-cap fund:
- Year 1: ₹2.3L (+15%)
- Year 2: ₹2.1L (-8.7%)
- Year 3: ₹2.8L (+33.3%)
- Year 4: ₹3.5L (+25%)
- Final Value: ₹3.5L
Absolute Return: 75%
CAGR: 15.1% p.a. (smoother, more realistic measure).
“CAGR helped me see that despite ups & downs, my fund grew steadily.”
Section 6: How to Use CAGR for Smarter Investing
1. Compare Investments Fairly
- FD @ 7% CAGR vs. Equity MF @ 12% CAGR → Pick based on risk appetite.
2. Set Realistic Goals
- Need ₹50 lakhs in 10 years? At 12% CAGR, invest ₹14,000/month.
3. Check Historical CAGR
- Before investing in a stock/MF, see its 5-year CAGR (Screener.in, Value Research).
4. Avoid Overestimating Returns
- Don’t assume past CAGR will repeat (e.g., 2021 crypto boom was an exception).
Section 7: Free Tools to Calculate CAGR
- Online CAGR Calculator (Moneycontrol, Groww)
- Excel Formula:
=((FV/IV)^(1/n))-1 - Mutual Fund Factsheets (Check “Annualized Returns”)
Conclusion: CAGR Helps You See the Big Picture
Absolute returns are exciting, but CAGR tells you the real growth rate of your money.
Action Step Today:
- Pick one investment (FD, stock, or MF).
- Calculate its CAGR over the last 5 years.
“CAGR doesn’t predict the future, but it reveals the past clearly.”
Quick Recap: Key Takeaways
✅ CAGR = Annualized growth rate (smoother than absolute returns).
✅ Use it to compare investments (FD vs. stocks vs. MFs).
✅ Not ideal for volatile/short-term returns.
✅ Check historical CAGR before investing.
