The compound annual growth rate (CAGR) is the rate of return (RoR) expected from an investment option if the returns generated during the tenure of the investment were constantly reinvested during the tenure of the investment. It indicates the compounded annualised average rate of return on your investments. CAGR is a useful tool for investors because it measures the average annual growth (or loss) of investments over time. Therefore, the compounded annual growth rate (CAGR) is one of the most precise methods for calculating and determining the average annual growth rate for any investment option whose value might rise or fall over time.
However, most investments don’t increase linearly at the same rate every year. Despite this, the CAGR calculator is extensively used as a ’go-to’ method to compare how different investments have performed over time, or against a benchmark.
CAGR can assist an investor in determining how much to invest today in order to attain a given financial goal over time. While annual returns are frequently used to analyse mutual funds and equities, the compounding factor is sometimes disregarded. As a result, these indicators usually overestimate returns, leading to poorer investment decisions. By using a standard rate of compounding, CAGR can deliver more reliable findings. It can also be used to analyse the performance of an investment, compare stocks or mutual funds, and even track business performance.
The CAGR calculator is an online tool that calculates the compound annual growth rate of an investment over a given period of time using a preset mathematical formula.
It answers the critical question of whether the investment in question yields the returns you are expecting during a given time or not. Kuvera’s CAGR Calculator automates maths for you and provides fast results to help you make better financial decisions available online, but it is important to pick one that offers the most user-friendly approach for calculation. Kuvera provides this online tool for free in an organised and easy to use manner. Kuvera’s CAGR calculator computes the annual average return in an instant, saving your valuable time and resources.
In contrast with the concept of absolute return, calculating an investment's CAGR indicates growth based on an element of time which is overlooked in the concept of absolute return.
Kuvera’s CAGR calculator comes in handy while calculating returns of various investment options. For example, two companies A and B, the performance of each company’s stock over a period of time can be easily compared based on their CAGR.
Three input values are required to be entered into Kuvera’s CAGR calculator:
The present value of the investment (PV)
The final value of the investment (FV)
The timespan or number of years of investment (active years) (n)
The mathematical calculation of CAGR is derived using this formula:
CAGR =[(Final Value/Present Value) ^(1/n)] - 1
You will get the result as soon as the data is computed into Kuvera's CAGR calculator.
For Example: Let's assume company A has an initial investment of Rs 10000 (PV) in its business and the total investment has grown to Rs 25,000 (FV) after 3 years (N).
(25,000/10,000)^(⅓) -1 = 35.72%
The CAGR is 35.72%
Kuvera’s CAGR calculator is a free online tool that can be used to assess your investment decisions based on CAGR. Within seconds, the Kuvera’s CAGR calculator can compute two types of investment returns based on the user's inputs, namely Absolute Returns and Compound Annual Growth Rate (CAGR).
The first step is to enter the initial value of the investment.
The second step is to enter the final value of the investment.
The third step is to enter the active years of investment.
Kuvera’s CAGR calculator will produce the results as soon as you fill in the values and show you the compounded annual growth rate.
If you've invested a lump sum in mutual funds for more than a year, you can use the Kuvera’s CAGR calculator. It can also be used to calculate the return on other investment funds within the same category in order to evaluate different CAGRs and select the investment with the highest expected return.
Kuvera's CAGR calculator can assist you in determining the value of your mutual fund investments. The average annual growth rate of a mutual fund over time can be compared to a benchmark. You can choose a mutual fund based on its past performance
Kuvera's CAGR calculator can assist an investor in determining how much to invest today in order to reach a particular financial objective over time. While annual returns are frequently used to evaluate mutual funds and equities, the compounding effect is sometimes disregarded. Consequently, these indicators frequently overestimate returns, which can result in suboptimal investment decisions. Therefore, CAGR can provide more accurate results by using a standard practice of compounding.
Kuvera's CAGR calculator can assist you to compare your performance with other similar instruments to determine if you are outperforming the market. For instance, if you previously purchased units of an equity fund and their value has increased, you may easily calculate your average annualised gains using CAGR.
Kuvera's CAGR Calculator is a simple and efficient tool for an easy CAGR analysis. Simply enter the initial and final investment values along with the duration of the investment, and you can arrive at the CAGR value without getting into confusing mathematical calculations.
CAGR is a significantly useful and widely accepted concept, yet it comes with its own set of limitations as mentioned below:
No matter how consistent a company's or investment's growth has been in the past, investors cannot assume that it will continue at the same rate in the future. The shorter the time period employed in the analysis, the less likely it is that the actual future CAGR would match the projected CAGR when using historical data.
CAGR calculations only take into account the beginning and ending values. It cannot be used to accurately assess risk. As an investor, you may not be able to understand the performance of an investment option just on a company's CAGR because short-term fluctuations are not considered.
CAGR is only appropriate for a lump sum investment. As in the case of SIP investment, the systematic investment at multiple intervals would not be reflected for computing CAGR, as only the initial amount and final amount are considered.
CAGR does not take into consideration the inherent risk of an investment.
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Let's assume Company A’s investment has a CAGR of 5% over the period of five years. It implies that investment since the beginning of the first year has grown at a rate of 5% (annualised average compound rate) for the next five years, assuming returns are reinvested at the end of each year.
Historically, If an investor is looking for stable returns in strong and large-cap companies from the equity market then 7-12% is considered a reasonably good CAGR. However, it is quite subjective and may differ as per individuals' risk appetite.
The CAGR of a fund or any investment option only shows how it has performed in the past. Typically, an investor may use it as one of the factors to make future projections, however, a higher CAGR is not a guarantee for similar future returns.
No, CAGR does not indicate or take into account investment risk.
If you wish to invest a lump sum, it is useful in calculating the compound annual growth rate (CAGR) of the various investment possibilities. If you invest at different times, using XIRR to make a judgement about your investments will provide you with more accurate results.
Absolute return indicates the total increase in the value of the investment and disregards the time period. CAGR return indicates the average annual growth rate of an investment. Absolute return is advantageous when the time period is less than one year.