What Is CAGR in Mutual Funds?

Say you invested an amount once, and some years later it is worth more. The investment did not grow by the same amount every year. Some years it rose sharply, some years it fell.

CAGR asks a simpler question: what constant yearly rate would have produced the same result? It smooths the bumpy path into one straight line.

Think of it like the average speed of a car journey. You slowed down in traffic and sped up on the highway, but the average tells you how long the trip took overall.

That is why it is useful for comparison. Two schemes with very different paths can be compared on one number over the same dates.

The formula takes the ending value divided by the starting value, raises that to one over the number of years, and subtracts one.

In short, it works backwards from where you ended up to find the one steady rate that explains the journey.

You do not need to do this by hand. Fact sheets show it, and any spreadsheet can calculate it. What matters more is knowing what it includes and what it leaves out.

Our page on how returns are calculated puts CAGR next to absolute return and XIRR so you can see the three side by side.

Absolute return is the total gain as a percentage, with no reference to time. A gain over one year and the same gain over six years look identical.

CAGR converts that total into a yearly rate, so time is taken into account.

For anything longer than a year, CAGR is the fairer figure. Absolute return is fine for a quick check of whether you are up or down, but not for comparing anything.

This is where most confusion comes from.

CAGR assumes one amount went in at the start and nothing was added or taken out. That is a lump sum.

A SIP puts money in every month, so each instalment has been invested for a different length of time. CAGR cannot handle that. XIRR can, which is why your SIP return should be judged on XIRR. Our page on what XIRR is explains it.

So if a scheme shows a strong five-year CAGR and your SIP XIRR looks lower, nothing is wrong. They are measuring different things, as our post on why your return looks different in three places covers.

The smoothing is useful and also the main weakness.

A scheme with a calm path and a scheme that fell sharply and then recovered can show the same CAGR. The second one would have been far harder to hold, and many investors would have sold during the fall.

This matters most for money with a near date, such as saving for a home renovation, where one bad patch at the wrong time hurts far more than any average suggests.

So CAGR tells you nothing about how the journey felt. For that, look at how far the scheme fell in its worst periods, which our page on risk and volatility explains.

CAGR depends entirely on the start and end dates you pick.

A period that starts just after a market fall will show a flattering number. A period that starts at a peak will look poor. The same scheme can look excellent or ordinary depending only on which five years you choose.

So when comparing schemes, use the same dates for both, and compare each against its own benchmark over those dates. Our page on the benchmark explains why.

A past CAGR says what happened over those particular years. It does not say what the next years will bring.

We do not publish return projections on this site. Where our calculators show a future figure, it runs on an assumption you type in yourself, such as in our SIP calculator. That is a what-if, not a promise.

Be careful with anyone who takes a past CAGR and presents it as what you will get.

Almost everywhere returns are shown.

Fact sheets show the scheme CAGR over one, three, five and ten years, next to the benchmark. Our page on the fact sheet explains how to read it.

Comparison websites and apps show the same numbers, sometimes for the direct plan and sometimes for the regular plan, which can make the same scheme look slightly different in two places.

Advertisements often pick whichever period looks best. That is legal as long as it is disclosed, but it is worth noticing which years were chosen and why.

Because a single CAGR depends so much on the dates, many analysts look at rolling returns instead.

A rolling return calculates the CAGR over every possible period of a given length, for example every three-year window over the last ten years. You then see the range: the best, the worst and the typical outcome.

That gives a much more honest picture than one headline figure. Our backtest tool lets you look at historical periods yourself.

• CAGR is a smoothed yearly rate between two values.
• Use it for lump sums and for comparing schemes over the same dates.
• Use XIRR for your own SIP.
• Check the dates, because they change the number a lot.
• Remember what it hides: the falls along the way.

If you want help reading the numbers on your own statement, get in touch.