The formula
CAGR = (ending value ÷ starting value)1/years − 1
If ₹1,00,000 grows to ₹2,50,000 in 7 years, the absolute return is 150%, but the CAGR is 13.99% a year.
CAGR, absolute return and XIRR
- Absolute return ignores time: 50% in 2 years and 50% in 10 years look the same.
- CAGR spreads growth evenly across the years, so investments of different lengths can be compared. It suits a single lump sum.
- XIRR is the right measure for SIPs, where money goes in on many dates. Fund apps and statements show XIRR for SIPs.
What is a good CAGR?
Compare it with inflation (about 5–6%) and with safe options such as the PPF at 7.1%. Large-cap equity in India has given roughly 10–13% over long periods, though any 5-year stretch can be much higher or lower.
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Questions people ask
Can CAGR be negative?
Yes. If the ending value is below the starting value, CAGR is negative, showing the yearly rate at which the value fell.
Is CAGR the same as average annual return?
No. The average of yearly returns overstates growth when returns swing. CAGR is the rate that actually links the start and end values.