How do I calculate CAGR?

For positive start and end values over n years, CAGR = (ending value / starting value)^(1/n) − 1. Multiply by 100 for a percentage.

Is CAGR the average of yearly returns?

No. CAGR is a geometric rate implied by the endpoints. An arithmetic average does not account for compounding in the same way.

Can I use the basic CAGR formula for monthly investments?

Not as a cash-flow-adjusted investor return. Dated contributions and withdrawals require a method such as XIRR; evaluating manager performance may instead call for time-weighted returns.

Glossary

What Is CAGR? Formula and Trading Limits

CAGR, or compound annual growth rate, is the constant annual rate that would turn a starting value into an ending value over a specified number of years. It smooths the journey and does not show drawdowns or guarantee the same return each year. The basic formula assumes comparable positive values without intervening external cash flows.

A simple rupee example

If ₹1,00,000 becomes ₹1,44,000 in exactly two years with no outside cash flows:

CAGR = (1,44,000 ÷ 1,00,000)^(1/2) − 1 = 20%

The absolute gain is 44%, while the constant compounded annual rate is 20%. The account need not have earned exactly 20% in either actual year.

Why the arithmetic average can mislead

A 50% gain followed by a 50% loss turns ₹100 into ₹75. The arithmetic average of those two returns is zero, but wealth has fallen by 25%.

CAGR respects the compounded endpoints. It still says nothing about the sequence of gains and losses.

Read CAGR with drawdown and exposure

Two strategies can have identical starting and ending equity but very different drawdowns, leverage and time in the market. A smooth implied annual rate can conceal a period in which the account nearly failed.

State whether the endpoint includes open-position value and whether fees are deducted. Do not mix a closed-trade balance with a marked-to-market equity start or benchmark.

For very short tests, label the annualized figure cautiously rather than treating it as a plausible forecast. More decimal places do not create more evidence.

Limitations

CAGR hides the path between endpoints.
Annualizing a short or selectively chosen backtest can exaggerate apparent reliability.

Frequently asked questions

How do I calculate CAGR?: For positive start and end values over n years, CAGR = (ending value / starting value)^(1/n) − 1. Multiply by 100 for a percentage.
Is CAGR the average of yearly returns?: No. CAGR is a geometric rate implied by the endpoints. An arithmetic average does not account for compounding in the same way.
Can I use the basic CAGR formula for monthly investments?: Not as a cash-flow-adjusted investor return. Dated contributions and withdrawals require a method such as XIRR; evaluating manager performance may instead call for time-weighted returns.

Last updated: 5 November 2026