Whether you are new to Stock Market Investment or an old hand, there are good chances you would have come across the acronym CAGR while reading news articles, company’s financial statements, or analyst commentary. The CAGR or Compound Annual Growth Rate tells us the average rate of return for any value that falls or rises over a period. In investments, it assumes that interest or return is accrued on the initial sum reinvested.
Companies, investors, and analysts use the metric to gauge and compare the growth rate of their business or investments over a set period. CAGR is not an actual growth rate but a representational growth rate that helps to read data easier. You can determine this value using the CAGR calculator. Formula to calculate CAGR:
CAGR (%) = (FV/IV)1/n – 1 x 100
Where,
FV = Final value
IV = Initial value
n = number of years
Instead of years as the value of ‘n’ above, use anything like a month, week, or quarter, to calculate the compound growth rate in that time frame, for example, Compound Quarterly Growth Rate. However, such measurements are seldom used.
How to use the CAGR calculator online to Calculate CAGR?
Let us assume you had invested Rs. 1 lakh in a Mutual Fund portfolio at the start of 2018. The value of corpus at the end of the next few years are:
2018: Rs 1,30,000 (Rate of return: 30%)
2019: Rs 1,01,000 (Rate of return: negative 22.30%)
2020: Rs 1,68,000 (Rate of return: 66.33%)
2021: Rs 2,01,362 (Rate of return: 19.85%)
As you can notice, even though your investment doubled over four years, the rate of returns every year was erratic. In one of the years, the portfolio even lost some value. This dataset will make it difficult to compare your portfolio returns with someone else’s. However, if we use the CAGR calculator to smoothen these numbers, we can get an idea of the average return on investment early, including interest on the accrued interest.
CAGR (%) = (2,01,362/1,00,000)¼ – 1 x 100 = 19.12%
So, on average, your investment grew 19.12% every year. However, in practice, you cannot start your investment at the start of the year. If you start your investment sometime in the middle of the year, say May 29, 2018, as mentioned, and withdraw money on November 30, 2021, calculating ‘n’ in the CAGR formula is not simple.
In such cases, you need to calculate the total number of days you remain invested, then divide by 365 days. Considering the mentioned example, there are 1,281 days from May 29, 2018, to November 30, 2021. Dividing by 365, we get:
n = 1,281/362 = 3.51
Assuming the initial and final value of the investment is the same, the resultant CAGR is:
CAGR (%) = (2,01,362/1,00,000)1/(3.51) – 1 x 100= 22.06%
Your investment grew at an annual rate of 22.06% in the 1,281-day period you were invested.
This is how one can calculate CAGR or Compound Annual Growth Rate
Also Read: Methods to Invest and Secure Your Future Using SIPs
