CAGR

CAGR stands for Compound Annual Growth Rate. It answers one question: what steady yearly rate would have taken my money from the start value to the end value? It smooths out the bumps, so it is useful for comparing funds over the same multi-year period.

Why a smoothed rate helps

Real returns are lumpy: a fund might rise 30% one year, fall 10% the next, and crawl 5% after that. CAGR replaces that jagged path with the single, constant yearly rate that would have produced the same final amount. So if ₹1 lakh became ₹2 lakh in six years, the CAGR is about 12%, the steady rate that doubles it in that time. It lets you compare two investments held over the same stretch on a like-for-like basis, instead of being misled by one good or bad year.

What it hides

Because it looks only at the start and end points, CAGR says nothing about the ride in between. Two funds with the same CAGR could have had wildly different journeys, one smooth, one terrifying. That is why CAGR is best read alongside a risk measure like standard deviation, which captures the swings CAGR irons out.

CAGR versus XIRR

Use CAGR for a single lump sum held over a period. It cannot handle money invested on many dates, like a monthly SIP, where each instalment stays invested for a different length of time. For that, use XIRR, which accounts for every date. In short: lump sum, CAGR; SIP, XIRR. Both are a kind of compounding rate.