TL;DR
CAGR = Compound Annual Growth Rate. It is the steady yearly return that would explain a fund's total change over a period, assuming smooth compounding.
If you invested ₹1 lakh and the fund's 5-year CAGR is 15%, your money would be worth about ₹2.01 lakh today.
Use CAGR to compare funds across different periods. Use absolute returns when the period is less than a year.
The formula, and an intuition
Example. You invest ₹100. After 5 years, it is ₹200.
- Absolute return = (200 − 100) ÷ 100 = 100% (you doubled)
- CAGR = (200 ÷ 100)^(1/5) − 1 = 2^0.2 − 1 = 14.87% per year
So "you doubled in 5 years" and "you earned 14.87% every year, compounded" are the same thing. CAGR is the compound rate that connects the start and end.
Why CAGR matters
Imagine you're comparing two funds:
- Fund A grew from ₹100 to ₹180 over 3 years
- Fund B grew from ₹100 to ₹200 over 5 years
Which did better?
Absolute returns would tell you: A = 80%, B = 100%. Looks like B won.
But CAGR tells the truth:
- A: (180 ÷ 100)^(1/3) − 1 = 21.6% per year
- B: (200 ÷ 100)^(1/5) − 1 = 14.87% per year
Fund A grew faster per year — it just had less time. CAGR normalizes the time factor so you can compare fairly.
How to read the CAGR numbers on a fund page
On any , you'll see multiple CAGRs:
Which one should you trust? The longer the period, the more reliable the number. A 1-year CAGR of 40% is exciting but might be pure luck (or a raging bull market). A 10-year CAGR of 15% is proof of consistent process.
When to use absolute returns instead
CAGR only makes sense for periods of 1 year or more. For shorter periods, use absolute returns (also called "point-to-point" returns).
Why? CAGR annualizes the number. If a fund gained 10% in 3 months and you annualize it, you get 46.4% — which sounds amazing but is misleading if the fund can't sustain that pace.
On MF Gyan we show:
- 1M, 3M, 6M returns as absolute (raw percentage)
- 1Y, 3Y, 5Y, since inception as CAGR (annualized)
The compounding intuition
CAGR shows you the magic of compounding.
Compare two hypothetical investments over 20 years, both with a starting amount of ₹1 lakh:
That's how much difference a few percentage points make when compounded over decades. This is why costs — like the — matter so much for long-term investors.
What CAGR does NOT tell you {#risk-metrics}
CAGR is a smoothed number. It hides:
- Bumpiness (volatility) — a fund with 15% CAGR could have gone up 50% one year and down 20% the next. Same average, very different experience.
- Max drawdown — the worst peak-to-trough fall. A fund with 15% CAGR might have dropped 40% at its worst — how would you feel about that?
- Sequence of returns — a big loss right at the start hurts more than one at the end, even if CAGR is identical.
Always look at CAGR alongside bumpiness and worst drops — which we surface prominently on every fund page.
Common CAGR mistakes to avoid
"This fund's 1-year return is 40%, so it will keep doing that." No. Recent returns are the least reliable predictor of future returns.
"This fund's CAGR is negative, so it lost money for me." Not necessarily. If you invested via SIP, your actual return is your XIRR, not the fund's CAGR. XIRR accounts for the timing of every deposit.
"A 20% CAGR is normal for equity." It's not. 20% CAGR sustained over 10+ years is rare and comes with significant volatility. Long-term averages for Indian equity indices are typically 12-15%.
Summary
- CAGR = Compound Annual Growth Rate, the steady yearly return
- Use CAGR to compare funds across different periods
- Use absolute returns for periods less than 1 year
- Longer periods (5Y, 10Y, since inception) are more reliable than short ones
- CAGR hides bumpiness — always look at max drawdown too
Next reads
- — the foundational post
- — every scheme with 1Y, 3Y, 5Y CAGR shown