CAGR Explained With a Simple Example

Understand what CAGR means and why it should not be confused with annual investment returns.

Compound Annual Growth Rate (CAGR) expresses the constant annualised growth rate between a beginning value and an ending value over a period.

Formula

CAGR = (Ending Value ÷ Beginning Value)^{1 / Years} − 1.

Example

If ₹1,00,000 becomes ₹1,46,410 over five years, CAGR represents the single annual rate that would produce the same end value if growth were compounded consistently.

What CAGR does not show

CAGR does not describe the path taken between the start and end dates. Two investments can have the same CAGR while having very different yearly returns.

When CAGR is not enough

When there are multiple deposits or withdrawals, a cash-flow-aware measure such as XIRR is generally more appropriate.