Compound Annual Growth Rate (CAGR) represents the average yearly growth rate of your investment over a specific period. It helps investors understand how much their investment has grown each year, assuming the profits were reinvested annually. CAGR provides a more accurate picture of investment performance compared to raw or absolute returns.
CAGR vs. Absolute Returns
Many investors often measure returns in absolute terms, which only show the total percentage gain over the entire investment period. For example, if you invested PKR 20,000 in 2015 and it grew to PKR 35,000 by 2020, your absolute return would be 75%. While that looks impressive, it doesn’t tell you how much your investment grew each year on average.
This is where CAGR becomes important. It smooths out the returns and shows the average annual growth rate, giving you a clearer understanding of your investment’s performance year by year.
How to Calculate CAGR
The formula for calculating Compound Annual Growth Rate (CAGR) is:
CAGR helps you determine the consistent annual growth rate of an investment over time.
Benefits of Using an Online CAGR Calculator
An online CAGR calculator makes it simple to analyze and compare investment growth. Here are some of the main benefits:
1. Evaluate Investment Growth Over Time
Unlike absolute returns, CAGR takes into account the duration of the investment. This makes it a more reliable measure of true growth over a specific time frame, whether you’re analyzing mutual funds, stocks, or your own business performance.
2. Compare Multiple Investments Accurately
CAGR allows you to compare the performance of different investment products on a like-for-like basis. Whether you’re reviewing mutual funds, stocks, or business growth, CAGR helps identify which option delivered the best annualized returns.
Using Rallys Equities’ CAGR Calculator, you can quickly measure and compare the performance of your investments and make smarter financial decisions.
