How is CAGR different from absolute return?

Absolute return is the total percentage gain over the entire period. CAGR converts that into an annualised figure, so you can compare investments held for different lengths of time.

Is CAGR better than annual return?

CAGR is a smoothed annualised figure across the full period. Annual return is what the investment actually delivered in a single year. They're both useful for different questions.

Why is CAGR sometimes lower than expected?

CAGR assumes steady compounding — if the investment had a few bad years, the smoothed average looks lower than the best years suggest. Volatility is hidden inside the single number.

Investing

CAGR (Compound Annual Growth Rate)

Also known as: Compound Annual Growth Rate, annualised return

CAGR is the smoothed annual rate at which an investment would have grown if it had compounded steadily over a given period.

CAGR is the single most useful number for comparing investment returns across different time horizons. It converts uneven, year-by-year returns into one steady annualised figure that makes apples-to-apples comparison possible.

The formula is CAGR = (Ending Value ÷ Beginning Value)^(1/years) − 1. So a mutual fund that grew from ₹1 lakh to ₹2 lakh over 5 years has a CAGR of about 14.87%. A fund that grew from ₹1 lakh to ₹3 lakh over 10 years has a CAGR of about 11.61%. CAGR makes both directly comparable.

What CAGR doesn't show is volatility. Two investments can have identical CAGR but very different journeys — one growing steadily, the other swinging wildly. For SIPs, CAGR is also slightly misleading because it doesn't account for the timing of contributions; XIRR (Extended Internal Rate of Return) is more accurate for SIPs.

Use CAGR to compare lump-sum returns. Use XIRR or rolling returns to evaluate SIPs. And always check the time period — a 5-year CAGR can look very different from a 10-year CAGR.

CAGR (Compound Annual Growth Rate)