Definition of CAGR (Compound Annual Growth Rate)
CAGR (Compound Annual Growth Rate) is the smoothed annual return of an investment over a specific period, assuming profits are reinvested each year. It tells you the consistent year-on-year growth rate that would take an investment from its starting value to its ending value.
Formula: CAGR = [(Ending Value / Beginning Value)^(1/n)] − 1, where n is the number of years.
Example: If ₹1 lakh grew to ₹2 lakh in 5 years, CAGR = [(2/1)^(1/5)] − 1 = 14.87%. CAGR smooths out volatility — a fund may return 30% one year and −10% the next, but the CAGR might be 15%. This is why CAGR is the standard for comparing mutual fund performance across different periods and categories.