CAGR (Compounded Annual Growth Rate)

CAGR is a term that would keep poping up when try to read about the financial performance of a Mutual Fund or a stock or any other financial instrument .

Let me try to expain what actually CAGR is and why is it important . Let us assume that we are analysing the performance of a stock over a period of last three years and we find that in last three years, the company has seen different % of growth . you may be tempted to ask , so instead of this fluctuating rate of growth , if the company had grown at what uniform rate , would we have seen the same level of growth.

So CAGR can be described as a way to calculate a uniform rate of return over a period of time when the actual rate of return has been fluctuating over the same period of time.

CAGR would help us to compare different Stocks,MFs or any other investments ,since we could never have compared these with a fluctuating rate of return .

CAGR = [(Current Value/Initial Value)^(1/# of years)] - 1

E.G:

Let us assume that a investment of Rs.100 has grown as shown and after three years has grown to Rs.225 , and we also see that every year it has grown by different %. so if we want to find a uniform rate of grown for these 3 year ..this is how we go about

CAGR = [(225/100)^(1/3)] - 1 = 0.3103 = 31.03% .

This mean that if Rs.100 grows by a uniform rate 31.03% each year , at the end of 3 years we will still endup with Rs.225

So CAGR can be described as a way to smoothen the curve .

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