What is CAGR?
CAGR (Compound Annual Growth Rate) is the steady yearly rate at which an investment would have grown from its starting value to its ending value. It smooths out ups and downs, which makes it the fairest way to compare investments held for different periods.
CAGR = (Final value ÷ Initial value)1 / years − 1
Example
₹1,00,000 growing to ₹2,50,000 in 6 years is an absolute return of 150%, but a CAGR of about 16.5% per year.
CAGR vs absolute return
Absolute return ignores time: 50% in 2 years is far better than 50% in 10 years. CAGR accounts for time, so always compare funds and stocks using CAGR. Note that CAGR assumes a single lump-sum investment; for SIPs, use XIRR instead.