CAGR = (Final Value / Initial Value)^(1/Years) − 1. It represents the steady annual return rate that would produce the actual growth observed.
CAGR — Everything You Need to Know
What is CAGR and why does it matter?+
CAGR (Compound Annual Growth Rate) represents the annual growth rate of an investment as if it had grown at a steady rate each year. It smooths out the year-to-year volatility of actual returns into a single comparable number. CAGR matters because it allows apples-to-apples comparison between investments of different sizes and durations. A fund that grew ₹1 lakh to ₹3.1 lakhs in 10 years has a CAGR of 12% — this one number tells you everything about its return quality.
What is a good CAGR for mutual funds?+
For Indian equity mutual funds: Large-cap funds typically deliver 10–12% CAGR over 10-year periods. Mid-cap funds deliver 13–16%. Small-cap funds deliver 15–20% but with significantly higher volatility. Index funds tracking Nifty 50 have historically delivered 11–13% CAGR. A CAGR above 15% over 10+ years is considered excellent performance and puts a fund in the top quartile. Below 8% CAGR for equity suggests underperformance compared to index benchmarks.
What is the difference between CAGR and absolute returns?+
Absolute return measures total growth without considering time: (Final - Initial) / Initial × 100. If ₹1 lakh becomes ₹2 lakh, absolute return = 100%. CAGR accounts for time: that same doubling in 5 years = 14.87% CAGR, but in 10 years = 7.18% CAGR. Absolute returns are misleading when comparing investments of different durations. Always use CAGR for multi-year performance comparison — a fund advertising "100% returns" sounds great, but 100% over 10 years is only 7.18% CAGR, which underperforms inflation-adjusted expectations.
What is the limitation of CAGR?+
CAGR has three key limitations: (1) It ignores volatility — two funds with the same CAGR may have very different risk profiles, with one having wild swings and another smooth growth. (2) It doesn't reflect cash flows — for SIP investments, XIRR is more accurate than CAGR. (3) It's sensitive to start and end dates — choosing a trough or peak as the start/end date can make CAGR look dramatically better or worse than the underlying investment quality warrants. Always look at rolling 3, 5, and 10-year CAGR for a complete picture.
What is XIRR and how does it differ from CAGR?+
XIRR (Extended Internal Rate of Return) is the return metric used for SIPs, where multiple investments are made at different dates. CAGR works for a single lumpsum investment. For a SIP where ₹10,000 is invested every month for 10 years, each instalment has a different holding period — XIRR accounts for this by calculating the annualised return considering the exact timing of each investment. When evaluating your mutual fund SIP performance, always use XIRR, not CAGR, for accuracy.