How to calculate CAGR (with examples)

Every investor encounters CAGR — Compound Annual Growth Rate — within minutes of reading a fund factsheet or analyst report. It's everywhere. But the number is routinely misread, misquoted, and misapplied. Here's how CAGR actually works, how to compute it yourself, and — just as importantly — where it quietly lies to you.

I'll walk through the formula, two worked examples with real arithmetic, how to replicate it in Excel in three different ways, and the situations where CAGR gives you a dangerously smooth picture of a bumpy journey.

What CAGR actually means

CAGR is the smoothed annual growth rate that would take an investment from its beginning value to its ending value over n years, assuming it grew at a perfectly steady rate every single year. It is a geometric construct — not an arithmetic one — which is why it is a better measure of investment performance than simply averaging yearly returns.

The key word is "smoothed." Real investments don't grow at a steady rate. A mutual fund might return +42% one year and −18% the next. CAGR collapses that entire journey into one clean annual figure that describes the net outcome, as if the ride had been perfectly smooth. That compression is both its strength and its blind spot.

The formula

The CAGR formula is:

CAGR = (Ending Value / Beginning Value)^(1/n) − 1

Where:

• Ending Value is the value of the investment at the end of the holding period.
• Beginning Value is the value at the start — what you put in (or what it was worth when you started measuring).
• n is the number of years (or periods) over which the growth is measured. If your period is in months, convert to years by dividing by 12.
• The exponent (1/n) is the key — it takes the nth root of the ratio, effectively "un-compounding" the total growth back to a per-year figure.
• Subtracting 1 converts the result from a ratio to a percentage-form return.

CAGR doesn't tell you what happened each year. It tells you what rate, if applied identically every year, would have produced the same ending balance. The journey is erased. Only the destination survives.

Worked example 1: a simple investment

Say you invest ₹1,00,000 in a mutual fund and after 5 years it has grown to ₹2,50,000. What is the CAGR?

Step 1 — compute the ratio: 2,50,000 ÷ 1,00,000 = 2.5

Step 2 — take the 5th root (i.e., raise to the power of 1/5 = 0.2): 2.5^0.2 = 1.2011 (approximately)

Step 3 — subtract 1: 1.2011 − 1 = 0.2011, or 20.1% per year

So this fund's CAGR over the 5-year period is approximately 20.1%. To sanity-check: ₹1,00,000 compounded at 20.1% for 5 years: 1,00,000 × (1.201)^5 ≈ ₹2,50,000. ✓

You can verify this yourself using the free CAGR calculator on this site.

Worked example 2: a stock holding

You buy 100 shares of a company at ₹320 per share in January 2021. By January 2026 — exactly 5 years later — the stock trades at ₹710. What CAGR did you earn?

Beginning Value = ₹32,000 (100 × 320). Ending Value = ₹71,000 (100 × 710).

Ratio: 71,000 / 32,000 = 2.21875

CAGR = (2.21875)^(1/5) − 1 = (2.21875)^0.2 − 1

2.21875^0.2 ≈ 1.1727, so CAGR ≈ 17.3% per year.

This is the figure you'd legitimately cite when comparing this holding's performance to, say, the Nifty 50's CAGR over the same period.

CAGR vs absolute return

A common mistake: quoting the total return and implying an annual rate. If your ₹1,00,000 became ₹2,50,000 over 5 years, the absolute return is 150% (a gain of ₹1,50,000 on a ₹1,00,000 base). It would be wrong to say "I earned 30% per year" — that would imply simple interest arithmetic: 5 × 30% = 150%. But compounding doesn't work that way.

The correct per-year figure, accounting for compounding, is 20.1% — not 30%. The gap between 30% and 20.1% is the effect of compounding on compounding: each year's gains themselves generate further gains in subsequent years, so you need a lower annual rate to reach the same ending value. Quoting absolute return as if it were an annualised figure overstates performance.

CAGR vs average annual return

This is the subtler trap, and it matters more than most investors realise. The average annual return (arithmetic mean of yearly returns) and the CAGR (geometric mean) are not the same thing, and they diverge sharply when returns are volatile.

A clean example: suppose an investment returns +50% in year one and −50% in year two.

• Arithmetic average: (+50% + −50%) / 2 = 0%. Looks fine — flat.
• Actual result: ₹1,00,000 → ₹1,50,000 (after +50%) → ₹75,000 (after −50%). You lost ₹25,000.
• CAGR: (75,000 / 1,00,000)^(1/2) − 1 = (0.75)^0.5 − 1 ≈ −13.4% per year.

The arithmetic average says 0%. The CAGR says −13.4%. The difference is called volatility drag (or variance drain) — the mathematical reality that losses hurt more than equivalent gains help, because percentage losses are applied to a smaller base. CAGR captures this; the arithmetic average does not. Always use CAGR, not averaged annual returns, when measuring investment performance.

How to compute CAGR in Excel

There are three equally valid ways in a spreadsheet, assuming your start value is in cell A1, end value in B1, and number of years in C1:

1. Direct formula: =(B1/A1)^(1/C1)-1 — this is just the definition typed out. Most transparent.
2. RATE function: =RATE(C1,0,-A1,B1) — treats it as a zero-coupon bond calculation. The negative sign on the start value is required (it represents an outflow).
3. RRI function: =RRI(C1,A1,B1) — the cleanest syntax; RRI stands for "equivalent interest rate" and is purpose-built for CAGR.

All three return the same number. I default to =RRI(n,Start,End) in shared models because it's the most readable to someone who didn't build the sheet.

Where CAGR misleads you

CAGR is a powerful summary statistic, but it has three structural limitations worth understanding before you act on it.

1. It hides volatility and the path

Two funds can have identical 5-year CAGRs of 15% and completely different year-by-year journeys — one steady, one with dramatic swings. CAGR tells you nothing about the ride. For risk-adjusted comparisons, you need metrics like the Sharpe ratio or maximum drawdown alongside CAGR, not instead of it.

2. It assumes a lump-sum investment

CAGR is built for a single beginning value and a single ending value. The moment you have interim cash flows — SIPs (systematic investment plans), partial redemptions, dividend reinvestments, capital calls — CAGR becomes the wrong tool. Each cash flow enters at a different point in time, and CAGR has no mechanism to account for that. The correct metric in these situations is XIRR, which handles irregular, dated cash flows and gives you the true annualised return on your actual money. I cover the difference in detail in the related article on IRR vs XIRR.

3. It is sensitive to start and end point selection

Because CAGR is anchored entirely to two data points, it is acutely sensitive to which dates you choose. A fund that peaked in January and troughed in December will show a very different 1-year CAGR depending on whether you measure to January or December. This is sometimes called "endpoint sensitivity," and it's the mechanism behind performance cherry-picking in fund marketing. Always check the period being measured — a 3-year CAGR starting after a crash looks very different from one starting at a peak.

When to use CAGR vs XIRR

Use CAGR when you made a single lump-sum investment, held it for a defined period, and want to compare the outcome against a benchmark or another instrument on an apples-to-apples annualised basis. It's the right metric for evaluating a stock holding, a fixed-maturity plan, or a one-time FD.

Use XIRR when there are multiple cash flows at different dates — SIPs, top-ups, withdrawals, dividends taken as cash. XIRR gives each rupee credit for exactly how long it was invested. For a typical mutual fund investor who has been running a monthly SIP for several years, XIRR is the only number that correctly reflects their personal return. CAGR applied to such a portfolio will almost always be wrong.

The two metrics are complementary, not interchangeable. CAGR benchmarks the instrument; XIRR measures your individual experience with it. Knowing which question you're actually asking is half the work.