CAGR (Compound Annual Growth Rate) is the standard metric for measuring investment performance over time. It represents the smoothed annual growth rate that takes an investment from its beginning value to its ending value over a specific period, assuming all intermediate values grow at the same rate. CAGR is the most meaningful way to compare returns across different investments and time periods.
CAGR Formula
CAGR = [(Ending Value / Beginning Value)^(1/Years) − 1] × 100. For example, if ₹1 lakh grew to ₹2.5 lakh in 7 years: CAGR = (2.5)^(1/7) − 1 = 14.07%. Note that CAGR is a smoothed rate — the actual year-by-year returns could vary wildly. A stock that went up 100%, down 50%, and up 100% over 3 years has a CAGR of 0% on a ₹1 lakh investment — it ends at exactly ₹1 lakh.
CAGR vs Absolute Return vs XIRR
Absolute Return = (Ending Value − Starting Value) / Starting Value × 100. It ignores time. CAGR annualises the return for fair cross-period comparison. XIRR (Extended IRR) is used for SIP investments with multiple, irregular cash flows — it gives each instalment a different time-weighting. For a single lumpsum investment, CAGR and XIRR give the same answer.
Benchmark CAGR Returns in India
Sensex 20-year CAGR (2004–2024): ~14%. Nifty 50 20-year CAGR: ~13.5%. Indian real estate (metro cities, 10-year): 6–10%. Gold (10-year): ~10%. FD (10-year average): ~6.5%. PPF: 7.1% (guaranteed). Equity mutual funds (large-cap category, 10-year average): 12–14% CAGR. Always compare your investment's CAGR against these benchmarks.
Frequently Asked Questions
What is a good CAGR for an investment?
A CAGR above India's long-term inflation rate (~6%) creates real wealth. A CAGR above the Nifty 50 benchmark (~13%) indicates alpha generation. For FDs and debt instruments, 6.5–8% CAGR is reasonable. For equity, 12–15% is considered good over a 10-year period.
Can CAGR be negative?
Yes. If the ending value is less than the beginning value (the investment lost money), CAGR will be negative. A stock bought at ₹500 that fell to ₹300 over 3 years has a CAGR of −15.9%.
How is CAGR different from IRR?
CAGR applies to a single lumpsum investment with one initial and one final value. IRR (Internal Rate of Return) works for investments with multiple cash flows over time, such as SIPs, rental properties, or business projects. For SIPs, use XIRR instead of CAGR.