CAGR Calculator

Average annual return simply adds up each year's percentage return and divides by the number of years, which can be extremely misleading. If an investment gains 50 percent in year one and loses 50 percent in year two, the average return is 0 percent, but your actual investment is down 25 percent because you lost 50 percent of a larger amount in year two. CAGR correctly accounts for this compounding effect and gives you the true growth rate. In this example, the CAGR would be negative 13.4 percent, accurately reflecting that you lost money. Always use CAGR rather than average return when evaluating investment performance over multiple years.

For Indian equity mutual funds, a CAGR of 12 to 15 percent over 5 to 10 years is considered good and roughly matches long-term historical averages. Large-cap funds typically deliver 10 to 13 percent, mid-cap funds 12 to 16 percent, and small-cap funds can deliver 15 to 20 percent but with significantly higher volatility. Debt mutual funds generally return 6 to 9 percent CAGR depending on the interest rate environment. Anything consistently above 15 percent CAGR over a decade in equity funds indicates exceptional fund management, but be cautious of funds showing unusually high short-term CAGRs as they may be taking excessive risk. Always compare a fund CAGR to its benchmark index over the same period.

CAGR describes historical performance and should not be blindly extrapolated into the future. Markets are cyclical, and a fund that delivered 18 percent CAGR over the last 5 years may deliver very different returns over the next 5 years due to changing market conditions, fund size, or strategy drift. However, CAGR is useful for setting realistic expectations. If the Indian stock market has delivered approximately 14 percent CAGR over the last 20 years, using 12 to 15 percent for long-term financial planning is reasonable. For conservative planning, use the lower end of historical ranges. The key insight is that CAGR helps you understand what has been achievable historically, which informs but does not guarantee future outcomes.

The standard CAGR formula only works for a single initial investment with no additional contributions or withdrawals. If you have been investing regularly through SIPs or made partial withdrawals, you need to use XIRR instead of CAGR. XIRR or Extended Internal Rate of Return accounts for the timing and size of each cash flow, giving you a more accurate return figure for irregular investments. Most spreadsheet software including Excel and Google Sheets has a built-in XIRR function. For a single lump sum investment held for several years with no intermediate cash flows, CAGR remains the simplest and most appropriate measure.

CAGR has several important limitations to keep in mind. First, it ignores volatility entirely, so two investments with the same CAGR can have very different risk profiles. Second, it assumes smooth growth which never happens in reality, so it can create a false sense of predictability. Third, CAGR is sensitive to the start and end dates you choose, so someone can cherry-pick periods to make performance look better or worse. Fourth, it does not account for taxes, fees, or inflation, all of which reduce your actual purchasing power. Finally, CAGR says nothing about the path your investment took, and the sequence of returns matters enormously for investors who are adding or withdrawing money regularly.