1. What is Compound Annual Growth Rate (CAGR)?

The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

Where:

• \( A \) — Final amount (currency)
• \( P \) — Principal amount (currency)
• \( T \) — Time period in years

Explanation: The formula calculates the smoothed annualized growth rate, eliminating the effect of volatility of periodic returns.

3. Importance of CAGR Calculation

Details: CAGR provides a single growth figure that describes the trajectory of an investment over time, making it easier to compare different investments and assess long-term performance.

4. Using the Calculator

Tips: Enter the final amount and principal in the same currency units, and the time period in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good CAGR value?
A: A good CAGR depends on the investment type and market conditions. Generally, higher CAGR indicates better performance, but it should be compared against relevant benchmarks.

Q2: Does CAGR account for volatility?
A: No, CAGR smooths out returns and doesn't reflect the investment's volatility or risk during the period.

Q3: Can CAGR be negative?
A: Yes, if the final value is less than the principal amount, CAGR will be negative, indicating a loss.

Q4: What are the limitations of CAGR?
A: CAGR assumes steady growth over time and doesn't account for intermediate cash flows, volatility, or compounding frequency.

Q5: How is CAGR different from average annual return?
A: CAGR accounts for compounding effect, while average annual return simply averages the yearly returns without considering compounding.