Compounded Annual Growth Rate (CAGR) is the annualised rate at which an investment grows from its beginning value to its ending value over a specified multi-year period, assuming all gains are reinvested and growth is compounded annually. It is calculated as: CAGR = (Ending Value ÷ Beginning Value)^(1÷Number of Years) – 1. Unlike simple annual returns (which can fluctuate significantly year to year), CAGR smooths out volatility and provides a single, comparable rate of return. For example, a mutual fund that grows from ₹1 lakh to ₹2.59 lakh over five years has a CAGR of 21%. In India, CAGR is the standard measure used to compare mutual fund performance, stock returns, company revenue and profit growth, and market index performance across different time periods. SEBI mandates that mutual fund advertisements display standardised CAGR figures for 1-year, 3-year, 5-year, and since-inception periods. Investors should compare CAGR against benchmark index CAGR to assess whether a fund or stock has generated genuine alpha.
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