How does one calculate the rate of growth of an investment over a long period?
There’s a straightforward metric called the CAGR or Compounded Annual Growth Rate, which expresses the effect of compounding while calculating the growth rate of your investments.
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CAGR indicates the compounded returns you earn on an annual basis irrespective of the annual performance of your investment.
Most likely, your investment does not grow at the same rate every year. At times it rises, at times it falls, perhaps even generates negative returns. CAGR lets you know how much your investment grew over a period of several years.
Illustration of a CAGR calculator
Let us say, you decide to invest ₹2,00,000 in stocks and after five years you make ₹450,000.
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Now, you want to calculate the average annual growth rate of your investment.
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The CAGR formula is:
CAGR={(End value/ begin value)^(1/ no. of yrs.)}-1
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CAGR = (450,000)/(2,00,000)^(â…•)-1
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In the above example, the compound growth rate CAGR is 17.61%.
While absolute returns would be {(450,000-2,00,000)/(2,00,000)}*100 = 125%
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Unlike absolute returns tells you how much your investment has earned over the entire duration, the CAGR tells you how your investment returns have performed year on year.