What is CAGR? Compound Annual Growth Rate Explained

By Creativelab · Last reviewed 2026-06-16

Quick answer: CAGR (Compound Annual Growth Rate) is the steady annualized rate at which an investment grew. Formula: CAGR = (Final/Initial)^(1/Years) − 1. A $10,000 investment that grew to $25,000 in 5 years has a CAGR of 20.11% per year. Use the CAGR Calculator to plug in your own numbers.

The CAGR formula

Multiply by 100 to convert to a percentage.

Worked example

You bought $10,000 of an index fund in 2021. In 2026 it's worth $25,000. Years held: 5.

• Ratio = 25,000 / 10,000 = 2.5
• 2.5^(1/5) = 2.5^0.2 ≈ 1.2011
• CAGR = 1.2011 − 1 = 0.2011 = 20.11% per year

The interpretation: if your investment had grown at a perfectly steady 20.11% every year, you would have ended up exactly where you are.

Why CAGR matters

Real investments don't grow in straight lines. A stock might go +50%, −20%, +35%, −10%, +60% over 5 years. To compare it against, say, a savings account at 4% interest, you need a single annualized number. CAGR provides that.

It's the only honest way to answer "how fast did my investment grow per year?" when the actual path was bumpy.

CAGR vs Average Return: not the same number

This is the most-confused topic in investment math. Watch:

An investment returns +100% in year 1, then −50% in year 2. The average return is (100 + −50) / 2 = +25%. But what actually happened?

• Start: $10,000
• After year 1 (+100%): $20,000
• After year 2 (−50%): $10,000

You're back where you started. The CAGR is 0%, not 25%. CAGR matches reality; average return doesn't.

This is the trap many mutual fund ads exploit. "Average return of 12%" sounds great, but if returns are volatile, the CAGR — the rate that actually grew your money — can be substantially lower.

CAGR for common indices and assets (historical)

Real returns (after inflation) are roughly 2–3% lower across the board. Long-term inflation in the US has averaged ~3%.

What CAGR doesn't tell you

• Volatility: two investments with the same CAGR can have very different risk profiles. A steady 8% per year and a wild +30%/−20% sequence averaging 8% are not equivalent.
• Path dependence: if you withdraw money during a downturn, your actual outcome is worse than CAGR suggests. This is "sequence-of-returns risk."
• Additional contributions: CAGR assumes a single lump sum at the start. If you contributed monthly, use the SIP Calculator instead.
• Inflation: CAGR is a nominal number unless you adjust for inflation. For real-return planning, see the Compound Interest with Inflation Calculator.

CAGR vs IRR vs Time-Weighted Return

Three related concepts that get used interchangeably (but shouldn't):

• CAGR: single lump sum at the start, single value at the end. No interim cash flows.
• IRR (Internal Rate of Return): handles multiple cash flows in and out — useful when you made several deposits or withdrawals.
• Time-Weighted Return: measures fund manager skill independent of when investors added/withdrew money. Mutual fund prospectuses report this.

For most personal investing questions ("how fast did my $X grow?"), CAGR is the right tool.

Frequently asked questions

Can CAGR be negative?

Yes. If your ending value is less than your starting value, CAGR is negative — an annualized loss. A $10K that fell to $7K over 3 years has a CAGR of (7000/10000)^1/3 − 1 = −11.41%.

Is CAGR the same as annualized return?

For a single-period lump sum, yes — they're identical. The terms are used interchangeably in finance writing.

Is a CAGR of 10% good for stocks?

It matches the long-term US stock market average. For a 5- or 10-year period it's a strong result; for a 1-year period it's underwhelming (stocks vary wildly year to year). Context matters.

How do I beat the CAGR of just the index?

Honestly, most investors don't — including most professional fund managers. The simpler approach is to match it cheaply via a low-cost index fund (Vanguard VTSAX, Nifty BeES, etc.), reinvest dividends, and stay invested for decades.

Calculate your CAGR

The CAGR Calculator takes your starting value, ending value, and number of years, and returns the CAGR plus absolute growth, total return percentage, and the growth multiplier (e.g., 2.5×).

For projecting future growth at a known CAGR (instead of measuring past growth), use the Compound Interest Calculator. If you contributed monthly rather than as a lump sum, the SIP Calculator is the right tool.

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