What is CAGR?
Compound Annual Growth Rate — annualised return assuming growth at a steady rate over a period.
Understanding CAGR
CAGR is the rate at which an investment would have grown if it grew at a steady annual rate over the entire period. It smooths out year-to-year fluctuations and provides a single annualised return figure for a given time horizon.
CAGR is calculated as: (Ending Value / Beginning Value)^(1/Years) − 1. It assumes a single lump sum invested at the start and redeemed at the end, making it appropriate for point-to-point performance of lump sum investments.
For IFAs, the key distinction is knowing when to use CAGR versus XIRR. Use CAGR for single lump sum investments and fund scheme performance. Use XIRR for SIP portfolios, staged investments, or any scenario with multiple cash flows at irregular dates.
“For Indian IFAs, a clear understanding of cagris essential to managing a compliant and profitable advisory practice.”
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