Understanding CAGR

CAGR (Compound Annual Growth Rate) answers 'what steady annual return, compounded, would have produced this same total result?' An investment that grew from ₹1 lakh to ₹2 lakh over 6 years has a CAGR of about 12.2% — even if the actual path was bumpy: up 40% one year, down 10% another, and so on.

This smoothing is exactly what makes CAGR useful for comparing two very different investments over the same period — a fund, a fixed deposit, gold — on a like-for-like basis, without needing to eyeball a year-by-year table of returns.

It's also exactly what can mislead. Two funds can have identical CAGR over 5 years while having wildly different volatility along the way — one might have swung 30% both directions, the other stayed within a narrow 8% band. CAGR alone tells you nothing about that ride, which matters enormously if you might need the money before the full period is up.

CAGR is also sensitive to the exact start and end dates chosen. A CAGR calculated from a market bottom to a market peak will look far better than the same fund's CAGR measured from peak to peak — always check what period is being used before comparing CAGR figures across sources.