CAGR stands for compound annual growth rate of an investment over time. The investment’s value is supposed to have multiplied over time. Unlike an absolute return, CAGR accounts for the time worth of money. As a consequence, it may accurately depict the annual returns on an investment.
The compound annual growth rate, or CAGR, depicts how an investment rises in value over time. In layman’s terms, it displays you how much your investment has grown each year over a certain period of time.
A CAGR Calculator
The CAGR calculator is a handy tool for calculating your investment’s compound annual growth rate over time. To calculate the CAGR, you’ll need to input the original investment value, the predicted ultimate investment value, and the number of years.
The CAGR calculator provides a formula box where you can enter the investment’s start and end values. You must also choose the duration of the investment. The CAGR calculator will show you your investment’s yearly rate of increase. CAGR may be used to compare returns on investment to a benchmark.
How Does a CAGR Calculator Work?
The following mathematical method may be used to compute the CAGR:
CAGR = [(Ending Value/Beginning Value) ^ (1/N)]-1
|CAGR||Compound Annual Growth Rate|
|Beginning Value of the Investment|
|Number of Years of Investment|
|N||Number of Years of Investment|
The CAGR formula above is dependent on three variables: the start value, the final value, and the number of years (N).
The CAGR calculator will calculate the rate of return on your investment when you enter the three factors.
For example, suppose your investment starts at Rs 15,000 and ends at Rs 25,000 after three years (N= 3 years).
CAGR is calculated as: CAGR = (25,000/15,000)^(⅓) – 1
CAGR = 18.56%.
The CAGR calculator may also be used to calculate the investment’s absolute return:
End Value – Beginning Value/Beginning Value * 100
For the same example you have:
(25000 – 15000)/15000 * 100 = 66.66%
Limitations of CAGR
CAGR has various limits, while being a useful idea. Some of the disadvantages of CAGR calculators are as follows:
- Only the starting and ending numbers are taken into consideration in CAGR calculations. It makes the assumption that growth is steady across time and ignores the issue of volatility.
- It is only appropriate for a one-time investment. The systematic investment at multiple time intervals is not included in the case of SIP investments, as only the initial amount is used to calculate CAGR.
- CAGR does not take into account an investment’s inherent risk. Risk-adjusted returns are more essential than CAGR when investing in stocks. To calculate the risk-reward ratio of an investment, you must utilise Sharpe’s and Treynor’s ratios.
Que.1 What is compound annual growth rate (CAGR) and how is it calculated?
Ans. The compound annual growth rate, or CAGR, shows how much an investment has grown over time. CAGR is a percentage-based indicator that may be used to calculate the annual pace at which your investment increases over a longer period of time. You may use CAGR to calculate the precise percentage of your investment returns each year throughout the course of your investment duration.
Que.2 What is the formula to calculate CAGR (CARG formula)?
Ans. CAGR = [(Ending Value/Beginning Value) (1/N)] Formula -1
For example, suppose your investment starts at Rs 10,000 and ends at Rs 15,000 after three years (N= 3 years). The CAGR is computed as follows: CAGR = (15,000/10,000)(13) – 1 CAGR = 14.47 percent
Que.3 In mutual funds, what is the CAGR return?
Ans. CAGR may be used to assess mutual fund performance. You may learn about a mutual fund’s average yearly growth or drop over a given time period.
For example, in 2015, you put Rs 1 lakh into the XYZ mutual fund. XYZ mutual fund had a NAV of Rs 20 and you received 5,000 units. For the end of three years, you redeemed all of these units at a NAV of 25. Your mutual fund investment is worth Rs 1,25,000 (5000 * 25).
(1,25,000/1,00,000) (13) – 1 = 7.72 percent CAGR of mutual funds
Que.4 What does CAGR mean in the stock market?
Ans. The Compound Annual Growth Rate, or CAGR, may be used to calculate the success of your stock investments over time. You can see how much your stocks have gained or lost over the course of the year.
For example, in 2016, you purchased 200 shares of XYZ for Rs 100. In the year 2018, you sold all 200 shares for Rs 150.
(30,000/20,000) (12) – 1 = 22.47 percent CAGR of equities
Que.5 In banking, what is CAGR?
Ans. The CAGR Full form is compound annual growth rate, depicts the real return on an investment. CAGR is more commonly used to calculate returns from mutual funds and equities than for banking. Instead of CAGR, consider annualised yield in banking. It’s the amount of interest you get every year on your overall investment.