What is CAGR?
CAGR refers to the mean annual growth of an investment over a specific duration. The value of the investment is assumed to be compounded over the period. Unlike the absolute return, CAGR takes the time value of money into the account. As a result, it can reflect the actual returns of an investment generated over a year.
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CAGR or Compound Annual Growth Rate shows you how an investment grows in value over a period. In simple words, it shows you how much your investment has earned each year for a given time interval.
What is a CAGR Calculator?
The CAGR calculator is a utility tool to calculate the compound annual growth rate of your investment over some time. You will have to enter the value of the initial investment, the expected final value of the investment and the number of years to calculate the CAGR.
The CAGR calculator has a formula box where you select the beginning and the ending value of the investment. You must also select the number of years of the investment. The CAGR calculator will show you the annual rate of growth of your investment. You can use CAGR to compare the return on investment against a benchmark.
How Does a CAGR Calculator Work?
The CAGR can be calculated using the following mathematical formula:
CAGR = [(Ending Value/Beginning Value) ^ (1/N)]-1
|CAGR||Compound Annual Growth Rate|
|Beginning Value of the Investment|
|Number of Years of Investment|
|N||Number of Years of Investment|
The above formula depends on three variables, namely, the beginning value, the ending value, and the number of years (N).
When you enter the three variables, the CAGR calculator will give you the rate of return on the investment.
For example, the initial value of your investment is Rs 15,000, and the final value is Rs 25,000 in three years (N= 3 years).
CAGR is calculated as: CAGR = (25,000/15,000)^(⅓) – 1
CAGR = 18.56%.
You can also calculate the absolute return of the investment using the CAGR calculator:
End Value – Beginning Value/Beginning Value * 100
For the same example you have:
(25000 – 15000)/15000 * 100 = 66.66%
How to Use the ClearTax CAGR Calculator?
The ClearTax CAGR calculator is a simulation that helps you to calculate the compound annual growth rate of your investment. It allows you to decide if the investment yields a significant return over time.
- You must fill in the initial value of the investment.
- You then fill the final value of the investment and the number of years of the investment.
- The CAGR calculator shows you the Compound Annual Growth Rate.
You can also use the CAGR calculator to calculate the absolute return on the investment.
- You enter the beginning and the ending value of the investment.
- The CAGR calculator shows you the absolute rate of return on the investment.
Benefits of Using the ClearTax CAGR Calculator
You can use the ClearTax CAGR Calculator to make the right investment decisions. It helps you to determine the annual rate of return of your investments. You may compare the returns from the investment against a relevant benchmark and analyse your investment decisions.
- The ClearTax CAGR Calculator is a simple, easy to use utility tool. All you must do is to enter the initial and final values along with the period of the investment. The calculator will show you the compound annual growth rate.
- The CAGR calculator helps you to calculate the returns from your mutual fund investments. You can compare the mutual fund’s average annual growth rate overtime against a benchmark. It allows you to choose the mutual fund based on past returns.
- You can also compare the performance of stocks against the peers or the industry as a whole using the compound annual growth rate.
- You may use the CAGR to determine how the investments in your portfolio have performed over some time.
Limitations of CAGR
Even though CAGR is a useful concept, it has some limitations. The following are some of the weaknesses of CAGR calculators:
- In calculations related to CAGR, only the beginning and ending values are taken into account. It assumes that growth is constant over the duration of time and does not consider the aspect of volatility.
- It is suitable only for a lump-sum investment. In the case of SIP investments, the systematic investment at various time intervals is not considered as only the beginning value is taken into account for the calculation of CAGR.
- CAGR does not account for the inherent risk of an investment. When it comes to equity investment, risk-adjusted returns are more important than CAGR. You must use Sharpe’s Ratio and Treynor’s Ratio to determine the risk-return reward of the investment.