Compound Annual Growth Rate (CAGR) : Back to basics

CAGR provides the year-over-year growth rate of an investment over a specific time. It provides a rate at which an investment would have grown if it had a steady growth rate. It is a mean annual growth rate.

Formula:
        CAGR = (A/P)^(1/n) -1
    
        where,

                 CAGR = Compound annual growth rate ( in decimal)

                         A = Final amount

                         P = Initial amount

                         n =  number of years

Example: If Rs. 10000 was invested in a mutual fund 3 years back and the current value is Rs. 15000, then CAGR is:
                        = ((15000/10000)^(1/3))-1
                        = 0.1447
                        ~ 14.47 %

A few usage scenario:

• Return generated by mutual funds. Return of mutual funds for more than 1 year is expressed in CAGR.
• Compare return for different investment instruments over a time period.
• Growth of companies