CalculatorsCAGR Calculator

# CAGR Calculator

Compound Annual Growth Rate (CAGR) measures the mean annual growth rate of an investment over a specified time period, accounting for compounding effects.

Initial Investment

₹ 1,000
₹ 1,00,00,000

Maturity Value

₹ 1,000
₹ 1,00,00,000

Duration of Investment

1 yr
40 yrs

Initial Investment

5,000

Maturity Value

25,000

CAGR is

37.97%

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## What is CAGR Calculator?

CAGR or Compounded Annual Growth Rate is commonly used in finance and investment to assess and analyse the returns of stocks, mutual funds, and investments. CAGR is a measure of the annual growth rate of an investment over a specified period, assuming the value is compounding over the specified period. CAGR provides a smooth representation of the growth investment, especially when the growth rate is not considered over the entire period. CAGR takes into account the compounding effect. This means that returns are not calculated on just a principal but also on the interest accumulated over time.

## Origin of CAGR

The usage of the CAGR concept and usage of compound interest can be traced back to ancient civilizations such as Babylonians and Egyptians. The principles of compounding have been understood for centuries. The exact date of the origins of CAGR remains unclear and it cannot be attributed to one specific date. CAGR became increasingly popular in the latter half of the 20th century to evaluate investment performance.

## CAGR Formula

The formula for Compounded Annual Growth Rate (CAGR) is -

CAGR = [(Ending Value/Beginning Value)^1/n] - 1

Where:
Ending value - The final value of the asset or investment at the end of the period
Beginning Value - The initial value of the asset or investment at the beginning of the period
n - Number of years in the period

This formula calculates the amount of investment in which the investment would have grown in a specified period, assuming it grew at a steady rate, compounded annually.

## How to calculate Compounded Annual Growth Rate (CAGR)?

Here are a few easy steps to guide you using the calculator:

1. Step 1: Find the growth factor:
The growth factor is nothing but the value derived by dividing the Ending value with the Beginning value.

2. Step 2: Calculate CAGR:
Take nth root of the growth factor figure. Meaning, if the growth rate figure comes Here, the nth root means the number of years. Then subtract the number by 1. The resulting figure (in %) is nothing but the CAGR.

Let us take numbers and calculate the Compounded Annual Growth Rate -
I have an amount of Rs. 10,000. I want to know what % it would take, compounded annually, to reach a figure of Rs. 16,000 in 5 years' time.

Going by the above method, here's the detailed breakdown -

1. Step 1: Calculating the growth factor:
Dividing 16,000 (Ending Value) with 10,000 (Beginning Value) gives us a growth factor of 1.60.

2. Step 2: Calculating the CAGR:
Take the 5th root (5√1.60) of the growth factor figure. This figure comes to 1.09856. After subtracting, it comes to 0.09856. After converting the same in %, the figure comes to 9.86%.

From the above, it can be said that it would take an annual compounding of 9.86% to reach Rs. 16,000 from Rs. 10,000 in 5 years.

## Benefits or Advantages of CAGR

### Easily Understandable:

The CAGR is a straightforward metric that can be easily understood by investors, stakeholders, and analysts without any pre-requisite of any advanced financial knowledge.

### Effective for Marketing or Reporting:

CAGR can be used in marketing materials and financial reports to highlight and communicate growth achievements. Present growth rates in terms of CAGR can attract investors or investors seeking consistent growth opportunities. It should also be noted that CAGR does not take volatility into account.

## How to use the Dhan CAGR Calculator?

With the advent of tools online, CAGR can be calculated in just seconds. Here's a simple guide on how you can calculate CAGR online -

1. Step 1: Add the amount to the initial investment
2. Step 2: Add final maturity value
3. Step 3: Add the duration of the investment

After adding the above inputs, the figure that you see in % is CAGR.

## Frequently Asked Questions

No. The percentage remains constant throughout the period in CAGR.

Unlike annualised returns, the interest amount of returns in CAGR remains different for different years and keeps on increasing with each passing year.

If you are an investor, CAGR is good for you if the % return is higher than annualised returns.
CAGR tells you the rate at which an investment grows in a specified period. 10% CAGR means you will earn a 10% return on your principal amount. And in the next year, the return will be calculated on the total amount (principal amount + interest earned) and so forth
A CAGR cannot be negative. A negative CAGR does not exist.
It completely depends on the risks involved. If the risks involved are similar and the % is the same, it is recommended to go for a CAGR.