What is CAGR

Compound Annual Growth Rate (CAGR) is a way of determining at what rate the value (investments) have grown over a period of time, assuming the investment has compounded annually.

What is a CAGR calculator?

CAGR calculator is a tool that helps you to calculate the rate at which your investments have grown annually. You need to provide the initial investment, final value of the investment, and duration of the investment. The calculator will show you the CAGR %.

How to use the FinanceDeft CAGR calculator?

You can use the FinanceDeft CAGR calculator to calculate the annual growth rate by inputting:

• Initial Investment - The investment you made at the beginning
• Final Investment Value - The total returns you have received at the end of the investment.
• Period of investment - Total duration of the investment. This can be either in years or months.

Once you enter these values, the calculator will show the rate at which the investment has grown during the investment period. If the period of investment is in months, then it will show the monthly growth rate.

What is the formula used for CAGR calculation?

The following formula is used to calculate CAGR returns

• FV - Future value of investment or returns received at the end of the investment.
• BV - Beginning value of investment or initial investment value.
• n - Total duration of the investment (in years or months).

For example, 5 years ago, if you have made an investment of ₹1000 and its current value is ₹2000 then the equation would be:

That is: 2^1/5-1 = 1.1487 - 1 = 0.1487 = 14.87%

What is the difference between CAGR and absolute returns

Absolute returns are calculated without considering the period of investment. It can be easily misleading or overwhelming. For example, if an investment of ₹1000 has grown to ₹10000 in a period of 20 years then the absolute returns would be 1000% (100*1000/100). However it is just 12.2% CAGR returns.

Can I calculate CAGR on a monthly basis?

Yes, you can. You just need to input the number of months in the period of investment. The resulting returns will be monthly growth rate.

Can CAGR be negative?

Yes. If the final return value is less than the initial investment value, then the CAGR can be negative. For example, if an investment of ₹10000 has become ₹5000 after 3 years, then the investment has grown at -20.63% annually.

Benefits of using the CAGR calculator

• Comparing returns: It helps in comparing the returns of 2 different investments. For example one investment grows your capital from 1000 to 1700 in 5 years and another 1000 to 2800 in 10 years. Then it will be difficult to understand which investment is gives a better returns. Here we can use the CAGR calculator to determine that the former has a CAGR of 11.2% and latter has 10.84%.
• Simple to use: CAGR calculator is very simple to use. All you need to know is the initial investment value, final value and duration of investment. You don’t need to know the complex mathematical formula behind it.

Limitations of using the CAGR calculator

• Market volatility: It does not takes into consideration about the market volatility. It assumes a smooth growth curve from beginning to the end. When you invest in market there might be years of under performance and even negative returns.
• Suitable for lump sum investment: CAGR calculator is useful for calculating returns rate of a lump sum investment. If you are doing SIP, then you will need an SIP calculator or if there are cash inflows at different dates, then you need an XIRR calculator.