The full form of CAGR is ‘Compounded Annual Growth Rate’. It’s used to calculate the return on investment over a period of time.
For example, you invest ₹ 1,000 in HDFC Bank shares and keep them for 5 years. The rate of returns won’t be constant every year. Due to the fluctuating nature of the stock market – returns will vary every year.
Let’s say the returns on HDFC Bank shares for 5 years are as follows:
That’s the yearly breakdown.
But what are the average returns from the beginning of your investment till the end? A ₹ 1000 investment in HDFC Bank has increased in value to ₹ 2,358.
The returns are calculated using the ‘Compounded Annual Growth Rate’ formula, which is – (end value / beginning value) ^ (1 / No. of Years) – 1.
For our above ‘HDFC Bank’ example, the calculation after applying the formula would be – (2358 / 1000) ^ (1 / 5) – 1.
This would give us our 5-year CAGR as 18.72%.
This single CAGR percentage will help you compare your returns from ‘HDFC Bank’ shares to other forms of investment like Fixed Deposits, Public Provident Fund (PPF), Mutual Funds etc.
In simple words, that’s the meaning of CAGR and that’s how the returns are calculated.
If you have any CAGR related questions, feel free to ask in the comments section below.