# How To Calculate CAGR For Stocks?

TOTAL VALUE

### CAGR CALCULATOR

Let us start with a rhetorical question. If Rs.1000 grows to Rs.1,368 in 3 years, what is your return. A very simple answer would be 368/3 = Rs.122.70 per year or 12.27% annual return on investment of Rs.1000. Is that correct? No, it is wrong because this is simple interest and we need compounded returns or CAGR returns. But how to calculate CAGR returns?

We will come back to the methodology, but let us look at the concept. If 1000 X 1.11 X 1.11 X 1.11 = Rs.1,368, what is the CAGR? The CAGR or compounded annual growth rate is not 12.27% but 11%. The CAGR calculator helps you to determine just that. Before we look at the CAGR calculator online, let us begin with understanding the concept of CAGR better. We will also touch upon CAGR calculator for SIP in mutual funds and CAGR calculator for stocks. It is over to CAGR calculator India.

### WHAT IS COMPOUNDING?

Compounding is the growth in capital in such a way that the returns also get accumulated as capital for the next year. If you invest Rs.10,000 in a bond that pays 9%, then at the second year, your principal is Rs.10,900 and the 9% will be calculated on that amount. This process will continue. Normally, by the fifth or sixth year, the contribution of compounding is more than the contribution of the interest on principal. That is how wealth gets created in the long run and compounding makes money work harder.

### WHAT IS CAGR?

CAGR is an abbreviated form of "Compounded Annual Growth Rate". For example, if your corpus of Rs.100,000 grows to Rs.180,000 in 5 years, what is the return. Here you must use the CAGR formula and it is much easier to do it through the CAGR calculator, as we will see later. CAGR is useful as it represents compounded growth and this compounded growth is at the core of business growth as well as investment growth. The concept of CAGR is especially useful for investors looking to build wealth or looking to plan for long term goals in life like retirement, children's education etc. These can be easily estimated using the CAGR calculator, which is available online. You can use the CAGR calculator to either estimate returns on investment or growth of a business. The essential principle remains the same.

### Let us quickly turn to how one must calculate CAGR?

Although, the CAGR calculator does the job of calculating the CAGR for you, it is best to understand the CAGR formula to calculate and understand how investments grow.

In case you know the initial investment and the final amount, you can use the basic geometric mean approach to calculate the CAGR returns. The formula is as under.

### CAGR = {(Future Value / Investment Value) ^ (1 / n)} - 1

This calculates the CAGR returns in the case of annualized compounding. Here "n" refers to the number of years. Let us understand this more clearly with an example.

### Illustration on CAGR calculation

Assume that you invest Rs.10,000, which is expected to grow to Rs.19,000 at the end of 5 years. Obviously, here the principal is directly being redeemed at premium so you must assume that returns are reinvested and hence CAGR will be the right method. Let us apply the formula now.

CAGR = {(Future Value / Investment Value) ^ (1 / n)} - 1

Hence CAGR = {(19,000 / 10,000) ^ (1 / 5)} - 1

That means, we first calculate the 5th root of 1.90 = 1.1369

Now (1.1369 - 1) = 0.1369 or 13.69%Now (1.1369 - 1) = 0.1369 or 13.69%

In other words, the investment of Rs.10,000 growing to Rs.19,000 in 5 years assumes a CAGR return of 13.69%, which can be approximated to 13.70%.

### HOW TO USE CAGR CALCULATOR ONLINE?

Here are some simple steps you need to use the CAGR calculator online.

a) Enter your initial investment that you are putting into the investment today.

b) Enter the tenure of the investment in number of years like 5, 8, 10 etc.

c) In the next step, put down the expected value of the investment at the end of the tenure laid out in (b). This value is either known in case of assured return investments or you have to estimate this final value.

d) Once these 3 items are entered, you get the CAGR percentage in a jiffy.

That is how simple the CAGR calculator is in practice.