What is CAGR?
Simply put, CAGR computes the growth clocked by an investment, assuming that it occurs at a steady rate. In other words, the CAGR smoothens the highs and lows between the investment tenure. An example should help us better understand the same. Assume that you invest Rs 10,000 in a mutual fund on September 28, 2004, and stay invested for a period of 3 years. As on September 28, 2007, the investment is worth Rs 30,000. This gives you a return of 44.2 per cent CAGR over the 3-Yr investment tenure. In other words, your investment grew at 44.2 per cent every year, during the 3-Yr period. This is how you calculate CAGR: CAGR = {(Present Value of Investment/Purchase Price) ^ [1/(Number of Years)] – 1} Why CAGR can be misleading As mentioned earlier, CAGR smoothens the highs and lows and puts forth a steady growth rate. In the example above, the 44.2 per cent CAGR doesn’t reveal the instances when the growth rate dipped below or rose above 44.2 per cent. Hence, the volatility in the fund’s per
