CAGR full form and meaning

The formula

CAGR = (Ending value ÷ Starting value)^(1 ÷ number of years) − 1

Example: ₹1,00,000 grows to ₹2,50,000 in 8 years. CAGR = (2.5)^(1/8) − 1 = 12.1% a year. The absolute return is simply the total gain: (2,50,000 − 1,00,000) ÷ 1,00,000 = 150%.

In a spreadsheet: =(End/Start)^(1/Years)-1.

Why absolute return misleads

Absolute return ignores time. A 100% gain sounds the same whether it took 3 years or 10:

Same absolute return, very different quality. Use CAGR to compare returns over different periods. You can run the numbers in the CAGR calculator.

The "rule of 72"

Divide 72 by the CAGR to estimate the years to double. At 12%, money doubles in about 6 years; at 8%, in about 9.

What CAGR hides

• The path. A fund that rose smoothly and one that crashed and recovered can show the same CAGR.
• Cash flows. CAGR assumes a single investment at the start. With a SIP, money goes in at many dates, so CAGR gives the wrong answer; use XIRR.
• The period you pick. A start date at a market low makes any fund look good. Look at several periods, or at rolling returns.

Trailing CAGR on factsheets

Fund factsheets quote 1, 3, 5 and 10-year returns. Returns for periods of a year or more are CAGR; returns for less than a year are absolute. Always check the label.