What is CAGR and How to Calculate It?

What is CAGR?

CAGR (Compound Annual Growth Rate) represents the average annual growth rate of an investment over a set period. It assumes that the investment grows at a steady rate each year, even though actual returns may vary. This metric is commonly used in stock markets, mutual funds, and business financial analysis to evaluate performance over time.

CAGR Formula = [(Ending Value ÷ Beginning Value)^(1 ÷ Number of Years) − 1] × 100

Where:

• Ending Value (EV): The investment’s value at the end of the period
• Beginning Value (BV): The initial investment amount
• n: The investment period in years

You can use this formula to calculate the annualized growth rate of lump-sum investment plans, mutual funds or stocks over a specified period.

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How to Calculate CAGR: Step-by-Step Example in AED

Let’s say you invested AED 50,000 in a mutual fund. After six years, its value increased to AED 80,000.

Here’s how to calculate its CAGR:

Step 1: Identify the values

• Beginning investment: AED 50,000
• Ending investment: AED 80,000
• Investment period: 6 years

Step 2: Apply the CAGR formula

CAGR = [(80,000 ÷ 50,000)^(1 ÷ 6) − 1] × 100

Step 3: Calculate the result

CAGR = [(1.6)^0.1667 − 1] × 100

CAGR = 8.15% (approximately)

This means your investment grew at an equivalent annual compounded rate of 8.15% over six years.

Remember, CAGR does not show how the investment performed in each individual year. It only uses the starting value, ending value, and holding period.

What is CAGR in Mutual Funds?

In mutual funds, CAGR measures how much the value of an investment has grown annually over a specific period. It is particularly useful when comparing the historical performance of funds held as a lump-sum investment.

For example, suppose two mutual funds started with AED 10,000:

Fund B has a higher CAGR, meaning it delivered a higher annualised growth rate over the same period. However, this alone does not make it the better investment. Also compare its risk, fees, investment strategy, and consistency of returns.

Important: CAGR is most suitable for lump-sum investments with a beginning and ending value. For a Systematic Investment Plan (SIP), where you invest at different intervals, XIRR is generally more appropriate. This is because it accounts for the timing of each investment.

Does Mutual Fund CAGR Include Dividends?

It depends on the return figure being reported:

• Price or NAV-based CAGR: Measures growth in the fund’s unit price or net asset value. It does not automatically include dividends distributed to investors.
• Total-return CAGR: Includes dividends or distributions, assuming they are reinvested where applicable.

Always check whether a fund’s reported CAGR is based on its price return or total return before comparing it with another fund.

How to Calculate CAGR in Excel (Formula and RRI Function)

You can calculate it in Microsoft Excel using a CAGR formula or the RRI function.

Suppose:

Use this formula =(B3/B2)^(1/B4)-1

Format the result as a percentage to get approximately 14.87%.

You can also use Excel’s RRI function:

=RRI(5,10000,20000)

Here, 5 represents the number of periods, 10,000 is the beginning value, and 20,000 is the ending value.

For transparent financial calculations, keep the inputs in separate cells instead of entering all the numbers directly into one formula. This makes it easier to check and update your calculations.

How to Use CAGR?

CAGR is useful in various financial scenarios, including —

• Investment Analysis: Evaluating stocks, mutual funds, and fixed-income securities
• Business Growth Measurement: Assessing revenue, sales, or market capitalisation trends
• Comparing Alternative Investments: Understanding how different investment options perform over time

CAGR in Mutual Funds and Stocks

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CAGR vs Average Annual Return: What’s the Difference?

CAGR and average annual return both help measure investment performance, but they calculate returns differently.

• CAGR: Uses compounding to calculate the equivalent annual growth rate between the beginning and ending values.
• Average annual return: Usually calculates the arithmetic average of individual yearly returns.

For example, suppose an investment earns 50% in the first year and loses 50% in the second year.

Although the average of the two yearly returns is 0%, the investment actually falls from AED 10,000 to AED 7,500. Its CAGR is, thus, negative.

This is why CAGR is useful for understanding compounded growth, while an arithmetic average does not account for the effect of compounding.

For investments with multiple contributions or withdrawals, see our guide to XIRR and how it differs from CAGR.

You can also read our guide to CAGR vs Absolute Returns to understand when to use each measure.

What is a Good CAGR for UAE Investors?

No single CAGR qualifies as good for every investor. It depends on the investment type, market conditions, risk level, and investment period.

For example, a fund delivering a 10% CAGR may appear attractive. However, it could carry higher market risk than another fund with a lower CAGR. Similarly, a return that looks strong over one year may not be consistent over five or ten years.

When evaluating investment options in the UAE, consider:

• Investment goals: Whether you are saving for retirement, education, wealth creation or another financial goal.
• Investment period: Compare funds over similar periods, such as three, five or ten years.
• Risk level: Check volatility, asset allocation, and the possibility of losing capital.
• Fees: Account for management fees, platform charges, and other applicable costs.
• Benchmark performance: Compare the fund’s CAGR with a relevant market benchmark.
• Consistency: Review performance across different market conditions rather than relying on one strong period.

Past performance does not guarantee future returns. Use CAGR alongside other measures before choosing an investment.

Not sure what annualized return your financial goal requires? Talk to a licensed investment advisor on Policybazaar.ae to understand the available options and risks.

Features to Consider When Using CAGR

Here are some key factors to consider when using CAGR to analyse investments —

• Market Fluctuations: Markets go up and down, which can impact CAGR. High short-term returns or losses don’t always last, so it’s important to consider long-term trends and volatility.
• Currency Changes: If investing in foreign markets, currency exchange rates can affect CAGR. Consider these fluctuations when evaluating returns.
• Risk: CAGR doesn’t show the risk involved in an investment. A higher CAGR may mean better returns, but it could also come with high risk. Always check the risk level before making decisions.
• Time Period: The longer the time frame, the more accurate the CAGR. Short-term calculations can be misleading, so use consistent time periods when comparing investments.
• Fees: Any applicable fees can reduce your actual returns. Always factor this in when calculating CAGR.

What is the Difference Between CAGR and AAGR?

AAGR stands for Average Annual Growth Rate. Both measures help assess growth, but they calculate it differently.

For example, if an investment grows by 10% in one year and falls by 10% in the next, its AAGR is 0%. However, its actual value falls from 100 to 99, so its two-year CAGR is around -0.50%.

This shows why CAGR and AAGR can give different results.

Common Mistakes to Avoid When Calculating CAGR

A small mistake in the time period or investment values can change your CAGR result. Keep these points in mind:

1. Counting the years incorrectly

The number of years is the elapsed time between the beginning and ending values, not necessarily the number of dates shown.

2. Treating annual returns as investment values

Suppose an investment delivers returns of 10% in 2021, 15% in 2022, and -4% in 2023. These are yearly returns, not beginning and ending investment values.

To calculate the overall growth, compound the returns:

• Start with an assumed value of 100
• After a 10% gain, it becomes 110
• After a 15% gain, it becomes 126.50
• After a 4% loss, it becomes 121.44

The three-year CAGR is approximately 6.69%.

3. Using CAGR for regular investments

CAGR is best for a single initial investment. If you invest AED 1,000 every month through a systematic investment plan (SIP), each instalment has a different investment period. XIRR is generally more suitable for measuring the annualised return on such cash flows.

4. Ignoring fees and distributions

Fund expenses, brokerage charges, and other costs can reduce your actual returns. Also check whether the investment values include reinvested dividends or distributions before comparing performance.

Key Insights You Should Know About CAGR

• A CAGR is not a guarantee of future performance — market conditions can change, and all investments carry inherent risks
• It helps investors understand the long-term performance of an investment by smoothing volatility, even if it experiences short-term ups and downs
• You can rely on it for longer investment periods because short-term fluctuations make the CAGR calculation less accurate
• It should be used alongside other financial metrics to get a complete understanding of investment performance

FAQs About CAGR Meaning

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