Question 1

Why use CAGR instead of average annual return?

Accepted Answer

CAGR accurately reflects volatility and compounding losses, whereas simple average returns overestimate portfolio growth.

Question 2

How do I calculate CAGR manually?

Accepted Answer

CAGR = (Final Value / Initial Value) ^ (1 / Number of Years) − 1. For example, ₹1,00,000 growing to ₹2,50,000 over 5 years: CAGR = (250000/100000)^(1/5) − 1 = 2.5^0.2 − 1 ≈ 0.2011 = 20.11% per year.

Question 3

What is the difference between CAGR and Absolute Return?

Accepted Answer

Absolute Return is simply the total percentage gain or loss without considering time. CAGR annualizes this, making it comparable regardless of how long you held the investment. An absolute return of 150% over 10 years is only a CAGR of 9.6% per year — very different from how impressive "150% return" sounds.

Question 4

Can CAGR be used to evaluate mutual fund performance?

Accepted Answer

Yes. CAGR is the standard metric used to evaluate mutual fund performance over specific periods (1-year, 3-year, 5-year, 10-year CAGR). It helps compare how consistently a fund has grown relative to its benchmark index or peer funds.

Question 5

What is a good CAGR for an equity investment?

Accepted Answer

For equity investments, a CAGR of 12–15% over the long term (10+ years) is generally considered good in the Indian context, as the Nifty 50 index has delivered approximately 12–13% CAGR historically. Top-performing actively managed equity funds have historically delivered 15–20% CAGR over long periods, though past performance does not guarantee future results.