Understanding Compound Annual Growth Rate (CAGR)
CAGR stands for Compound Annual Growth Rate which is one of the crucial financial metrics used for investment and financial analysis. It is a financial ratio which speaks about the average annual growth rate that any asset has generated over a particular period.
With the cagr return calculator, you can calculate this financial ratio without doing multiple mathematical calculations. CAGR is important for investors not only to analyse the average growth of any investment over a period but also to compare different investment options and make informed decisions.
Introduction to CAGR Calculator
The cagr calculator is a financial tool for finding out the financial ratio CAGR. The calculator in no time provides the CAGR of an investment when you enter certain variables which the cagr calculator online requires.
Online calculator for CAGR calculations helps not only investors but also anyone who is looking to calculate the CAGR of any asset or investment product. This calculator is a no-fee calculator and you can use the calculator as many times as you want without paying any amount.
You can say that even you can calculate CAGR using an Excel financial calculator (physical) but for those, you need to know which formula to apply, then you need to calculate the CAGR individually every time for different investments which can be highly time-consuming and tedious and also require professional knowledge of investment and financial ratio analysis. While using the cagr return calculator you can easily find out the CAGR within a few seconds.
How to determine Compound Annual Growth Rate?
For calculating CAGR, the formula that is being used is as follows –
CAGR = (Ending Value of the investment/ Beginning Value of the Investment) ^ (1/n) -1
CAGR Calculator Examples
Suppose, you invested Rs. 50000 in a mutual fund (lump sum) in 2018 and in 2023, the value of the investment has become Rs. 120000.
Therefore,
CAGR of this investment = (120000/50000) ^ (1/5) -1
= 19.14%
How to use CAGR Calculator?
As mentioned above, the CAGR calculator would take only around a few seconds to derive the CAGR of the investment option you can calculate the financial for. You need to enter certain variables such as the investment made by you initially, then the final amount of the investment at present, and the number of years you stayed invested or if it is running investment, then put the number of years already passed after the initial investment.
Once you enter these variables, the growth calculator will give you the CAGR for the investment. The underlying formula that is used by this calculator is the formula given above and as you can see, there you can change the variables like the investment’s starting amount and ending amount and the tenure of investment.
Why Compound Annual Growth Rate (CAGR) Calculator is important?
CAGR is regarded as one of the most important financial metrics when it comes to the analysis of investments. It helps the investors find out how different assets/ investment options performed even if the tenure of investment are different and the nature of the assets is different. The reason is CAGR gives you the average return generated by the investment every year. It helps you compare between different assets and investment options and here is an example for the same.
Suppose you have invested in two mutual funds, scheme A and scheme B. You started investing in scheme A in 2013 with Rs. 10000 and the current value of this investment is Rs. 120000. While in scheme B, you started investing in 2017 with Rs. 15000 and the current investment in this scheme stands at Rs. 120000 as well. So, while the outcome of both investments may be the same, the average rates at which both investments grow are different. While scheme A is offering 28.21% while Scheme B is offering a CAGR of 34.59%.
Now, if you consider the absolute return, you can say that scheme A is better than scheme B as the absolute return of scheme A is 1100% while that of scheme B is 700% but in reality, the latter is generating a higher return for you.
With the help of the CAGR Calculator, you can easily find out the CAGR of different investments like this and make wise investment decisions.
CAGR helps in evaluating the return of the entire portfolio of investment as well which helps in proper asset allocation and diversification in the portfolio.
That said, CAGR and actual return generated in a year can be entirely different. As markets are volatile, CAGR doesn’t consider the volatility factor. It gives an average annual return and that doesn’t mean that every year your investment has earned the same return. Also, taxes and dividends are not considered while calculating CAGR which is why need to analyse these factors separately while evaluating the CAGR of different investment options.
Comparing CAGR with Other Financial Metrics
Taking a cue from the above limitations of CAGR, for a thorough and wise evaluation of any investment, you need to take into consideration CAGR, Internal rate of return (IRR), average annual return, and annualised total return.
Benefits of the Compound Annual Growth Rate (CAGR) Calculator
The CAGR calculator online benefits investors in multiple ways –
- It saves a lot of time which otherwise would have been wasted in calculating CAGR for multiple investment options for picking the most suitable one.
- Manually calculating CAGR for different assets can lead to inaccuracy or error in the results which can lead to wrong decision making. Thus, using the cagr return calculator, you can calculate the financial ratio accurately every time and take informed decisions.
- The CAGR calculator helps in evaluating the growth of any business which helps the creditor, along with the investors take informed decisions about the business.
