CAGR

Compound Annual Growth Rate (CAGR) is the rate at which an investment would have grown if it had grown at a steady rate every year from start to finish. It smooths out the volatility of year-to-year returns to provide a single, easy-to-compare growth figure.

For example, if you invested Rs 1,00,000 in Reliance Industries in 2019 and it grew to Rs 2,50,000 by 2024 (5 years), the CAGR would be: (2,50,000 / 1,00,000)^(1/5) - 1 = 20.1%. This means the investment grew at an equivalent rate of 20.1% per year, even though actual annual returns varied wildly (maybe +45% one year, -10% the next).

CAGR is the standard metric for comparing investments across different time horizons in India. When a mutual fund reports "15% CAGR over 10 years," it means Rs 1 lakh invested 10 years ago would have grown to approximately Rs 4.05 lakh. SEBI mandates that mutual fund advertisements show returns in CAGR format for periods exceeding one year, ensuring standardised comparison.

However, CAGR has limitations. It masks the journey — two investments with identical 5-year CAGR of 12% might have very different risk profiles. One may have steadily returned 11-13% annually, while another fluctuated between -30% and +50%. CAGR also does not account for intermediate cash flows (SIPs, dividends, partial withdrawals) — for those scenarios, XIRR (Extended Internal Rate of Return) is the appropriate metric.

In Indian financial planning, CAGR benchmarks are widely used: equities are expected to deliver 12-15% CAGR over long periods, gold 8-10%, fixed deposits 6-7%, and inflation 5-6%. Understanding CAGR is essential for goal-based planning — knowing that a Rs 5 crore retirement corpus at 12% CAGR requires approximately Rs 10,000 monthly SIP for 25 years makes the concept tangible and actionable.