CAGR Formula: How to Calculate Growth Rate
CAGR (Compound Annual Growth Rate) is calculated as [(End Value / Start Value) raised to the power of (1 / number of years)] minus 1. It smooths an investment's growth into a single yearly percentage, which is useful for comparing investments but does not reflect year-to-year ups and downs, or the effect of adding money partway through.
CAGR (Compound Annual Growth Rate) is calculated as [(End Value divided by Start Value) raised to the power of (1 divided by the number of years)] minus 1. It gives you a single, smoothed annual growth percentage that, if applied steadily every year, would take your starting value to your ending value over that time period, even if the real investment moved up and down along the way.
Breaking down the formula
- Start Value: the value of the investment at the beginning of the period.
- End Value: the value of the investment at the end of the period.
- Years: the number of years between the start and end values.
- Result: a percentage representing the smoothed, compounded annual growth rate.
Because it uses a compounding exponent rather than a simple average, CAGR accounts for the fact that growth in later years builds on top of growth from earlier years, similar to how compound interest works.
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Worked example
Assume you invested Rs 1,00,000 in a mutual fund, and 5 years later it is worth Rs 1,80,000.
| Variable | Value |
|---|---|
| Start Value | Rs 1,00,000 |
| End Value | Rs 1,80,000 |
| Years | 5 |
CAGR = [(1,80,000 / 1,00,000)^(1/5)] - 1 = [1.8^0.2] - 1 = 1.1247 - 1 = 0.1247, or about 12.47% per year. This means your investment grew as if it had compounded at a steady 12.47% every year for 5 years, even though the fund's actual year-to-year returns were almost certainly not identical each year.
CAGR versus absolute return
The absolute return on the same investment is simply (End Value minus Start Value) divided by Start Value, which here is (1,80,000 - 1,00,000) / 1,00,000 = 0.80, or 80%. This tells you the total percentage gain over the whole period, but says nothing about how long it took to get there. CAGR turns that same 80% total gain into an annualised figure, which is far more useful for comparing two investments held for different lengths of time; an 80% return over 5 years is a very different result from an 80% return over 15 years, even though the absolute return number looks the same.
Always check both numbers together when comparing investments: absolute return tells you the total gain, and CAGR tells you the annual pace of that gain. A high CAGR over a very short period and a moderate CAGR over a long period can both look attractive for different reasons.
Why CAGR is not the same as XIRR
CAGR assumes a single lump sum invested at the start and withdrawn at the end, with nothing added or removed in between. If you invested through a SIP, made additional lump-sum top-ups, or withdrew money partway through, CAGR on the overall start and end values will not accurately represent your real return, since it ignores the timing of each individual cash flow. XIRR (Extended Internal Rate of Return) is built specifically for this situation, since it accounts for the exact date and amount of every inflow and outflow, which is why SIP returns are usually reported as XIRR rather than CAGR.
Using CAGR to compare two different investments
CAGR is most useful when you want to compare two investments that ran for different lengths of time or started with different amounts, since it strips both of those differences away and leaves just an annual growth percentage. If one investment turned Rs 50,000 into Rs 75,000 over 3 years, and another turned Rs 2,00,000 into Rs 3,50,000 over 6 years, comparing the raw rupee gains tells you very little, since the amounts and time periods differ so much. Converting both to CAGR (about 14.5% and 9.8% per year respectively, in this example) puts them on the same footing and shows the first investment actually grew faster per year, despite the smaller starting amount and shorter period.
What CAGR does not tell you
A single CAGR number hides how bumpy the ride actually was. Two investments could have exactly the same CAGR over five years, with one growing at a steady, predictable pace each year and the other swinging between strong gains and sharp losses before arriving at the same final value. If the smoothness of returns matters to you, look at year-by-year performance or a standard deviation figure alongside CAGR, rather than relying on CAGR alone to judge how comfortable an investment was to hold.
Common mistakes when using the CAGR formula
- Applying CAGR to a SIP or any investment with multiple deposits, when XIRR would give a more accurate picture.
- Confusing CAGR with absolute return, and comparing investments held for different time periods using absolute return alone.
- Forgetting that CAGR is a smoothed figure; the actual year-by-year returns were almost certainly not identical to the CAGR percentage.
- Treating a past CAGR as a guaranteed future rate, when real investments carry no such guarantee.
This article uses example figures for illustration only and is not investment advice; confirm actual returns and projections with your investment statements or a financial professional. For a fixed-rate calculation instead of a market-linked one, see the compound interest formula guide or the SIP calculator for regular monthly investments.
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Frequently asked questions
What is the CAGR formula?
CAGR = [(End Value / Start Value) raised to the power of (1 / number of years)] - 1. It gives a single, smoothed annual growth rate over the period.
How is CAGR different from absolute return?
Absolute return is the total percentage gain over the whole period, with no regard for how long it took. CAGR converts that total gain into an annualised rate, which makes it easier to compare investments held for different lengths of time.
Can I use CAGR to measure my SIP returns?
Not accurately, since CAGR assumes a single lump sum invested at the start with nothing added later. For a SIP or any investment with multiple deposits or withdrawals, XIRR gives a more accurate annualised return.
Does a high CAGR mean the investment grew steadily every year?
No. CAGR is a smoothed figure; the actual year-to-year returns could have been much higher in some years and lower or negative in others, while still averaging out to the reported CAGR over the full period.
Is past CAGR a guarantee of future returns?
No. CAGR describes what already happened over a specific historical period. It is not a promise of how an investment will perform going forward, especially for market-linked investments without a fixed rate.
Sources
- Khan Academy, Introduction to compound interest (checked 2026-09)
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