How To Calculate CAGR For Stocks?



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.

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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 Calculator?

CAGR stands for Compound Anual Growth Rate and it shows the return you can expect from investments. A CAGR online calculator is an online tool used to calculate the compound annual growth rate of an investment over time. CAGR calculator requires you to enter the initial investment value, the expected final investment value, and the number of years.

How to Calculate CAGR?

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%.

CAGR Formula

To compute the compounded annual growth rate (CAGR) for an investment, follow these steps using the CAGR calculation formula:

  • Divide the final investment value by the initial value.
  • Raise the resulting quotient to the power of one divided by the investment's tenure in years.
  • Subtract one from the overall result.

Mathematically, here'show to calculate CAGR return:

CAGR = (FV / PV) ^ (1 / n) - 1

In the provided formula, FV represents the future value of the investment, PV represents the present value of the investment, and 'n' signifies the number of years the investment spans. Let's examine a hypothetical scenario to gain a clearer grasp of the calculation. Suppose you invested Rs. 20,000 in a mutual fund in 2015; by 2020, the investment had grown to Rs. 35,000.

CAGR= (35000/ 20000) ^ (1/5) - 1 = 11.84%
In this context, the outcome indicates that the mutual fund investment yielded an annualized average return of 11.84%. You may also determine the absolute returns on the investment using a CAGR calculator. The calculation would be as follows:

Absolute returns= (FV- PV) / PV * 100 = (35000-20000)/ 20000 * 100 = 75%

This implies that your mutual fund investment provided you with an absolute return of 75% throughout its duration.

How To Use IIFL's CAGR Calculator?

The IIFL CAGR calculator is a simulation tool designed to help you determine the CAGR of your investments. It enables you to assess whether the investment has generated a good return with time.

  • Start by entering the initial investment value.
  • Proceed to input the final investment value and the investment duration in years.
  • The CAGR online calculator will provide you with the CAGR.
  • Additionally, you can employ a CAGR return calculator to compute the absolute return on your investment.
  • Simply enter both the initial and final values of your investment.
  • The CAGR online calculator will display the absolute return rate achieved on your investment.

Advantages of IIFL's CAGR Calculator

The IIFL CAGR Calculatoris a valuable tool for aiding your investment decisions.

  • This facilitates the assessment of your investments' yearly return rate and permits you to contrast these returns with an appropriate benchmark, thus enabling an analysis of your investment choices.
  • This straightforward and user-friendly utility, the IIFL CAGR Calculator, only requires you to input the initial and the final values with the investment duration. Subsequently, the calculator will provide you with the CAGR.
  • The CAGR online calculator will provide you with the CAGR.
  • Additionally, you can employ a CAGR return calculator to compute the absolute return on your investment.
  • This CAGR calculator online is particularly beneficial for computing the returns from a mutual fund investment.
  • You can gauge the mutual fund's average annual growth rate over time and juxtapose it with a benchmark, helping you make informed decisions based on historical performance.
  • Furthermore, you can employ the compound annual growth rate to evaluate the stock's performance relative to the entire industry or its peers.
  • Lastly, CAGR is a useful metric to assess how your portfolio investments have fared over a specific time frame.

CAGR vs Absolute Returns

Investments are undertaken to generate profits, and there are various ways to measure the returns on those investments. Absolute returns provide a straightforward approach for assessing investment returns without considering the investment's time frame. It calculates returns by comparing the initial investment amount to the maturity amount. In contrast, the compounded annual growth rate (CAGR) considers the investment's duration or tenure, offering a more precise and comparable percentage that reflects earnings over time.

The formula for Absolute return

((Current investment value/ Initial investment) - 1) * 100.

The formula to calculate CAGR

CAGR = ((Ending value/ Beginning value) ^ (1/n)) - 1

Where n is the tenure of the investment

CAGR Calculator FAQs

What is CAGR?

CAGR, which stands for Compound Annual Growth Rate, is a metric that reflects the growth of your investments. It serves as a gauge of the annual performance of your investments on average. You can effortlessly ascertain the average yearly performance of your investments through the convenience of an online CAGR calculator.

What is a good CAGR percentage?

A favourable CAGR range for large companies within an industry typically falls between 8% and 12%, whereas high-risk companies tend to target a desirable CAGR ranging from 15% to 25%. CAGR, which stands for Compound Annual Growth Rate, is a metric used to project a consistent rate of return over multiple years. Essentially, it represents the steady growth rate sustained over several years.

What is CAGR return?

CAGR, or Compound Annual Growth Rate, indicates an investment's mean annual growth while considering compounding. It is regarded as one of the most precise approaches for determining the ascent or descent of your investment returns as time progresses.

Why is CAGR important?

The Compound Annual Growth Rate, abbreviated as CAGR, signifies an investment's average annual growth rate throughout a defined period exceeding one year. It is one of the most precise methodologies for computing and ascertaining returns for individual assets, investment portfolios, or any assets susceptible to fluctuations in value over time.

What is the CAGR Ratio?

CAGR can be regarded as a geometric progression ratio, commonly recognized as a prominent financial metric for comparing the returns of various investments. The CAGR Ratio allows you to assess and compare investment returns across a specific timeframe, aiding you in making informed decisions. Choosing the investment with the higher CAGR Ratio often signifies the better choice.