What Is the CAGR Formula? An Easy to Understand Guide

No image 5paisa Capital Ltd - 1 min read

Last Updated: 16th December 2025 - 12:04 pm

The CAGR formula is a very important tool for investors who want to understand how an investment grows over time. Many people confuse CAGR with average annual returns, but CAGR gives a more precise picture by accounting for the compounding effect, which is crucial for long term financial planning. Knowing how to calculate CAGR formula helps you compare different investments and make informed financial decisions.


Compound Annual Growth Rate measures the annual growth of an investment assuming it grows steadily over a specified period. The primary components needed for the CAGR formula are the beginning value, ending value, and the number of years the investment is held. By applying the formula, you get the consistent yearly growth rate, which smooths out the fluctuations caused by market volatility. This makes CAGR especially useful for comparing stocks, mutual funds, or SIPs.


While short-term returns may fluctuate, the CAGR formula provides a reliable long term financial perspective, making it easier to evaluate the performance of your portfolio against other investment options.


The practical benefit of understanding the CAGR formula is immense. Investors can set realistic financial goals, calculate expected growth for retirement planning, or assess whether their investments are meeting the expectations. 


Understanding the method of correctly calculating the CAGR, you will have a clear view of the long term trajectory of your investments, which in turn will aid you in making more prudent investment decisions, as well as making more accurate comparisons and providing the properly informed decision. Additionally, it will remove some of the confusion caused by short term market fluctuations, allowing you to focus on the actual growth of sustainable assets.
 

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