CAGR Explained: The Only Return Metric That Matters
CAGR — Compound Annual Growth Rate — tells you the steady annual rate at which an investment would have grown to reach its final value, smoothing out year-to-year volatility. If a mutual fund grew from ₹1 lakh to ₹2.5 lakh in 6 years, its CAGR is 16.5%, which is far more meaningful than saying it gave a '150% absolute return.' CAGR is the standard return metric used by SEBI-registered mutual funds in India for performance disclosure and is essential for comparing FDs, PPF, and equity investments on equal footing.
Frequently asked questions
Quick answer
What is the difference between CAGR and absolute return?
Absolute return only tells you total gain as a percentage (e.g., 80%), with no reference to how long it took. CAGR annualises that gain — an 80% return over 4 years is a 15.8% CAGR, while the same 80% in 8 years is just 7.7% CAGR. CAGR allows apples-to-apples comparison across investments held for different periods.
What is the difference between CAGR and absolute return?
Absolute return only tells you total gain as a percentage (e.g., 80%), with no reference to how long it took. CAGR annualises that gain — an 80% return over 4 years is a 15.8% CAGR, while the same 80% in 8 years is just 7.7% CAGR. CAGR allows apples-to-apples comparison across investments held for different periods.
How do I calculate CAGR manually?
CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) − 1. For example, ₹50,000 growing to ₹1,20,000 in 8 years gives CAGR = (1,20,000/50,000)^(1/8) − 1 = 11.5%. Most investment apps in India display CAGR automatically in the portfolio section.
Is CAGR the same as XIRR?
No — CAGR assumes a single lump-sum investment at the start, while XIRR accounts for multiple cash flows at different dates, making it the correct metric for SIPs. If you invest ₹5,000/month via SIP, use XIRR to measure your actual return; CAGR would overstate or understate depending on your investment timing.
What is a good CAGR for a mutual fund in India?
For large-cap equity funds over 10 years, a CAGR of 12–15% is considered strong in the Indian context. Anything consistently above 15% over a 10-year period is exceptional; be cautious of funds advertising high CAGRs over short 1–3 year windows, as markets can be cyclically elevated.