How to calculate CAGR for stocks?

CAGR CALCULATOR

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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.


FREQUENTLY ASKED QUESTIONS (FAQ)

What is an Ideal CAGR?


There is nothing like the ideal CAGR. But when you are undertaking any project or investment, the CAGR calculator can precisely tell you if you are earning more than your cost of capital. Keep that as a benchmark and ensure that the CAGR returns is more than the cost of funds and also compensates for risk taken.


Benefits of calculating CAGR?


It gives the precise return in an investment assuming that intermittent cash flows are reinvested. Apart from telling you whether the investment is earning more than cost of funds, the CAGR calculator also tells you the rate at which wealth is compounding.


Difference between CAGR & Annual Average growth return?


The CAGR calculator uses the implied compounded returns and uses the compound interest concept to calculate returns. The annual average growth applies simple interest and does not give precise or accurate results of returns and growth.


Is the CAGR calculator free for use?


CAGR calculators are available to use free of cost since it is the basic decision point for any investor. You are not required to login or get into a secured area while using CAGR calculator online.


Does CAGR Factor future risk?


CAGR is about compounded returns over time. You must use the CAGR return as the benchmark to decide if it is enough to cover your cost of funds and the risk taken in any investment. For example, if debt funds are giving 7% returns and equity funds are giving 6.5% CAGR returns, that is a bad idea as it is not coving the risk.