CAGR (Compound Annual Growth Rate) is the average annual growth rate of an investment over a period of time, assuming the profits are reinvested each year. It helps understand how much an investment has grown each year on average.
Example:
Imagine you invest ₹10,000 in a mutual fund.
- After 1 year, your investment grows to ₹11,000.
- After 2 years, it becomes ₹12,100.
- After 3 years, it reaches ₹13,310.
Even though the growth may not be the same each year, CAGR helps calculate a consistent annual growth rate.
Using the formula:
CAGR = (13,310 / 10,000)^(1/3) - 1
CAGR = 10% per year
This means that, on average, your investment grew by 10% every year for three years.