CAGR

CAGR represents the average annual rate of return an investment has generated over a specific period, taking compounding into account. Unlike the simple average return, which just looks at the starting and ending values, CAGR considers the reinvestment of returns year after year, providing a more realistic picture of growth.

Why is CAGR important? Here are some compelling reasons:

Compares Across Different Timeframes: CAGR allows you to compare the performance of investments across different time periods, making apples-to-apples comparisons even if the investment durations vary.

Highlights Long-Term Trends: By smoothing out year-to-year fluctuations, CAGR reveals the underlying long-term growth trend of an investment, helping you assess its overall potential.

Sets Benchmarks: You can use CAGR to benchmark the performance of your investments against market indices or other assets, gauging their relative success.

Imagine you invest ₹10,000 in a mutual fund. After three years, your investment grows to ₹13,310. While the simple average return might suggest a 11.03% annual return, the CAGR paints a slightly different picture. Using the CAGR formula, we calculate a 10.25% annual growth rate, accounting for the compounding effect of reinvested returns.

By understanding and effectively utilizing CAGR, you gain a valuable tool for analyzing investment performance and making informed decisions. Remember, financial literacy empowers you to navigate the market with confidence and potentially achieve your financial goals.