What Is a CAGR Calculator?
The Compound Annual Growth Rate (CAGR) calculator is a financial tool designed to calculate and determine the CAGR of an investment or financial asset. The online CAGR calculator is commonly used in finance, investing, and business analysis to assess the performance of investments or projects over time.
A CAGR is a measure of the annual growth rate of an investment or asset over a specified period, assuming that the investment has been compounding over that period. The online calculator provides a quick and convenient way to determine the annualised growth rate of an asset or investment, taking into account the compounding effect. By calculating the CAGR of investment or any other parameter in an instant, the lumpsum CAGR calculator helps investors assess the performance and potential of their investments. It aids in making informed financial decisions, comparing investment options, and setting realistic expectations for future returns. This enables individuals to plan their financial goals more effectively and make informed investment choices.
How does a CAGR Calculator Work?
The online CAGR return calculator calculates the CAGR by taking the initial and final values of an investment and the duration over which the compounding happened. In real life, CAGR calculations can be applied to multiple parameters such as stock prices, investment value, sales growth, profit growth and much more.
The Lumpsum CAGR calculator simplifies complex calculations by taking into consideration only three sets of data points - initial investments, growth rate, and tenure. Here's how it typically works:
Initial Value – The starting value of the investment or any other parameter being evaluated
Final value – The Final value of investment or any other parameter being evaluated Number of Years – The period over which the growth happened
Once you've input these values, the calculator will perform the CAGR calculation using the formula:
CAGR = [(Final Value / Initial Value) ^ (1 / Number of Years)] - 1
The calculator will then display the CAGR growth. It may also provide a summary of the result for your convenience.
How to calculate and use CAGR for investments: Explained with an Example!
Let's say you invest ₹50,000 in a mutual fund , and after 5 years, it grows to ₹81,000.
This is how it looks-
Initial Value: ₹50,000
Final Value: ₹81,000
Number of Years: 5
The formula for CAGR remains the same:
CAGR = [(Final Value / Initial Value) ^ (1 / Number of Years)] - 1
Here is the step-by-step calculation for you:-
Divide the Final Value by the Initial Value: 81,000/ 50,000 = 1.62
Take the 5th root of that result: 1.62 ^⅕ ≈ 1.1019
Substitute these values in the formula we get,
CAGR = [(81,000/50,000)^(⅕)]- 1
CARG = [(1.62)^(⅕)]- 1
CARG = 1.1019 - 1
CARG = 0.1019
Multiply by 100 to get it as a percentage: 0.1019×100=10.19%
So, the CAGR for this investment over the 5 years would be approximately 10.19%.
Calculating CAGR for your investments helps you understand how each investment has grown on an annual basis. Since the CAGR calculator returns the annual growth rate of investments, CAGR can be used to compare different investments made for different durations of time. E.g. Let's say you have two investment options:
Investment A:
Initial Value: ₹1,00,000
Final Value after 3 years: ₹1,30,000
Investment B:
Initial Value: ₹1,00,000
Final Value after 5 years: ₹1,60,000
Directly comparing these two investments, one might say that investment B performed better since the final value of investment B is more than that of A. While investment A delivered 30% absolute returns, investment B delivered 60% absolute returns.
However, the right way to compare these two investments would be to use the online CAGR calculator to calculate the CAGR for each.
Using the online CAGR calculator above, we find out that:
CAGR for Investment A: 9.14%
CAGR for Investment B: 8.45%
So, even though Investment B has a higher ending value (₹1,60,000) compared to Investment A (₹1,30,000), the CAGR tells us that Investment A grew at a faster rate per year (9.14%) compared to Investment B (8.45%).
So, if you're looking for a higher annual rate of return, Investment A would be the better choice based on the CAGR.
What are the advantages of using a CAGR calculator?
Advantages of a CAGR return calculator include accurate investment performance assessment, simplified comparisons, setting realistic return expectations etc. The online CAGR calculator helps investors make informed decisions and assess the long-term growth potential of various investments.
Here are some elaborated advantages of the CAGR calculator-
- Accurate Investment Performance Assessment- An online CAGR calculator provides a precise measure of how an investment has performed over time, considering the compounding effect. This accuracy is vital for evaluating the actual returns on investments and calculating their success.
- Simplifies Comparisons- A CARG calculator simplifies comparison by calculating the CAGR for different investments or assets, simplifies the process of comparing their performance over different periods. Investors can easily determine which investment has delivered a higher and more consistent annual growth rate, helping in decision-making.
- Sets Realistic Return Expectations- The lumpsum CAGR calculator helps individuals set reasonable expectations for their investment returns. It offers a more balanced and dependable perspective on how an investment is likely to grow in the long term, preventing overestimation or unrealistic goals.
- Informed Decision-Making- With CAGR figures at hand, investors can make well-informed financial decisions. They can assess the performance of investments, choose options that align with their financial goals, and develop strategies based on a more accurate understanding of historical growth rates.
