What is the full form of CAGR ?

Introduction

The Compound Annual Growth Rate (CAGR), which is based on the assumption that an investment has been compounded annually, is a financial term used to assess the rate of return on an investment over a specific period.

An economic statistic known as the compound annual growth rate (CAGR) is used to study the annual growth charge of a hypothesis over a specified time body. This indicator considers the effect of compounding, which occurs when returns from previous years are reinvested to supply better returns in the future. The CAGR may be a useful device for evaluating the rates of the boom of several hypotheses over a specified time period because it provides an institutionalized degree of increase that takes compounding into account.

What is CAGR vs. annual growth rate?

CAGR (Compound Annual growth rate) is a degree of development rate over a specified period that considers the impact of compounding. It calculates the development rate in case it has been consistent over time, while the yearly development rate calculates the actual year-by-year development rate without considering the compounding impact. CAGR is valuable for comparing speculation returns, commercial enterprise execution, or financial development rates over various periods. In contrast, yearly development fee offers greater precise information nearly the year-to-year changes in development.

Year	Starting Value	Ending Value	Annual Growth Rate	CAGR
2017	$100	$110	10%	-
2018	$110	$125	13.6%	11.8%
2019	$125	$145	16%	14.9%
2020	$145	$170	17.2%	15.3%
2021	$170	$195	14.7%	14.6%

In this example, we are comparing the annual growth rate and the CAGR of an investment that has increased in value over the past 5 years. The annual growth rate is calculated as the percentage change in value from one year to the next, while the CAGR is the average annual growth rate over the entire period. As we can see in the table, the annual growth rate varies from year to year, while the CAGR provides a more consistent measure of the investment's overall performance.

What is 3 year Compound Annual Growth Rate?

let's take an example to illustrate the concept of CAGR.

Assume you invested $10,000 in a stock in 2018, and after 3 years, the value of your investment has grown to $15,000. To calculate the CAGR for this investment, we need to know the annual growth rate over the 3-year period.

To calculate the annual growth rate, we can use the following formula −

Annual Growth Rate = ((Ending Value / Beginning Value)^(1/number of years)) - 1

In our example, the annual growth rate can be calculated as follows −

Annual Growth Rate = (($15,000 / $10,000)^(1/3)) - 1 = 14.87%

Now, to calculate the CAGR, we can use the following formula −

CAGR = ((Ending Value / Beginning Value)^(1/number of years)) - 1

In our example, the CAGR can be calculated as follows −

CAGR = (($15,000 / $10,000)^(1/3)) - 1 = 4.42%

Therefore, the 3-year CAGR for this investment is 4.42%. This means that the investment grew at an average annual rate of 4.42% over the 3-year period.

What is CAGR means in mutual fund?

In mutual funds, the Compound Annual Growth Rate (CAGR) is a measure of the return on investment over a certain period of time. It takes into consideration the impact of compounding on investment returns, which is the method of reinvesting benefits over time to create extra returns. CAGR gives a more exact picture of the annualized return on venture compared to the average annual return, because it considers the affect of compounding. Mutual fund financial specialists can utilize CAGR to assess the execution of a support over a indicated period and compare it with other stores. It can too offer assistance financial specialists to assess future returns based on verifiable information.

Conclusion

To sum up, the Compound Annual Growth Rate (CAGR) is a significant financial measure that provides a single figure to indicate the annual growth rate of an investment over a specific period of time. CAGR is a more effective indicator of investment performance than the annual growth rate as it takes into account compounded returns. It is commonly used to analyze mutual funds, stocks, and other investments. Investors can use CAGR to evaluate the past performance of investments and make informed decisions regarding future investments. In general, CAGR is a crucial tool that helps investors make sound investment decisions by providing a comprehensive picture of the investment's performance.

FAQs

Q1. How is CAGR useful for investors?

Ans. CAGR helps investors to evaluate the long-term performance of an investment and make informed decisions based on the historical returns. It also helps in comparing the performance of different investments with different investment periods, and in identifying the investment opportunities that have the potential to generate higher returns.

Q2. What is the relationship between CAGR and the rule of 72?

Ans. The rule of 72 is a quick way to estimate the number of years it will take for an investment to double, given a fixed annual rate of return. The rule of 72 is calculated by dividing 72 by the annual rate of return. CAGR can be used to calculate the annual rate of return required to double an investment in a specific number of years. For example, if an investor wants to double their investment in 5 years, they need to achieve a CAGR of approximately 14.87% (calculated using the CAGR formula).

Q3. Can CAGR be negative?

Ans. Yes, CAGR can be negative if the investment experiences a decline in value over the investment period. Negative CAGR indicates that the investment has lost value over time.