CAGR (Compound Annual Growth Rate) is a financial metric used to measure the mean annual growth rate of an investment over a specified period, assuming the investment grows at a steady rate. Unlike simple growth calculations, CAGR accounts for the effect of compounding, providing a more accurate representation of investment performance over time. It is widely used by investors, analysts, and financial planners to compare returns across different assets and assess long-term growth potential.

The formula for calculating CAGR is: CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1. This formula smooths out fluctuations in annual returns, offering a single growth rate that describes how an investment would have grown if it had increased at a consistent rate each year. CAGR is particularly useful for evaluating mutual funds, stocks, portfolios, and business revenue growth over multiple years.

One of the key advantages of CAGR is its simplicity and comparability. It allows investors to benchmark different investment options, irrespective of annual volatility. For example, comparing two mutual funds over five years using CAGR provides a clearer picture of overall performance than comparing year-on-year returns.

In India, investors commonly use CAGR to assess the growth of equity investments, mutual funds, SIP portfolios, and company revenues. Financial advisors and SEBI-compliant research reports often present CAGR to help clients make informed long-term investment decisions. While CAGR indicates average growth, it does not reflect short-term risks or market fluctuations, so investors should use it alongside other performance metrics.

In summary, CAGR (Compound Annual Growth Rate) is a vital tool for measuring investment growth over time, accounting for compounding effects. Understanding CAGR helps investors evaluate long-term performance, compare investment options, and make informed financial decisions while maintaining realistic expectations about returns and risks.