12 Jun 2025
Compound Annual Growth Rate (CAGR), shows how much your mutual fund investment has grown each year on average over a period of time. It helps smooth out the ups and downs of the market and gives a clear idea of the investment's overall performance.
Let’s say you invested ₹10,000 in a mutual fund, and after 5 years, it becomes ₹15,000. CAGR tells you the average yearly growth rate that led to that increase, even if returns varied each year.
Understanding what is CAGR in mutual funds helps you:
- Understand long-term growth
- Compare different funds
- Make better investment decisions
CAGR is especially useful for long-term investors as it reflects steady growth and takes compounding into account. Because its “smooths” annual fluctuations, it should be used together with other risk‑and‑return measures.
What is CAGR?
CAGR expresses the single, annualised rate at which an investment would have grown if it had generated the same return every year across a defined period. It helps you see overall growth even if the market has had ups and downs.
CAGR in mutual funds becomes particularly helpful when comparing different funds or tracking your own investment journey. It gives a clearer view of how your money is growing and supports better decision-making for long-term investing.
What is Compounding?
Compounding is the process where your investment earns returns, and those returns also start earning more returns over time. It’s like. you get interest on not just the principal but also on the accrued interest.
For example, if you invest ₹10,000 and earn ₹1,000 in a year, next year you’ll earn returns not just on ₹10,000, but on ₹11,000. This cycle keeps going, and your money grows faster the longer you stay invested.
Compounding works best with time and consistency. The earlier you start and the longer you invest in mutual fund, the more your money may grow. It’s one of the biggest reasons why long-term investing is considered to be so dominant. However, growth depends on market performance and is not guaranteed.
How is CAGR Calculated?
It is essential to understand the calculation methodology for CAGR.
Let’s say you invested ₹10,000, and after 5 years, it becomes ₹15,000. CAGR helps you understand the average yearly growth in a simple number.
Here’s the basic formula: CAGR = (Final Value / Starting Value) ^ (1 / Number of Years) – 1
Using the numbers: CAGR = (15,000 / 10,000) ^ (1/5) – 1 | CAGR ≈ 8.45%
So, your money grew by about 8.45% every year on average.
This calculation helps compare different investments and gives a clearer idea of long-term growth, even if the market went up and down in between.
How Does CAGR Work for Mutual Funds?
CAGR, or Compound Annual Growth Rate, shows the average yearly growth of your mutual fund investment over a certain period. It helps you understand how steadily your money has grown, even if the market went up or down during that time.
For example, if you invest ₹10,000 and it becomes ₹15,000 in 5 years, CAGR tells you what steady rate of return would have led to that final amount. It gives a clear picture of long-term growth by smoothing out yearly fluctuations.
Understanding CAGR acts as one indicator of performance but should be considered with risk and consistency metrics. It avoids misleading impressions caused by short-term spikes or dips and supports smarter fund comparisons.
Why CAGR Matters for Mutual Fund Investors
CAGR in mutual funds is an essential concept for investors who want to evaluate performance properly.
For investors, CAGR is useful because:
- It shows how well a fund has performed over the long term.
- It helps you compare different mutual funds easily.
- It considers the effect of compounding, which helps your money grow faster.
- It avoids the confusion of one-time high or low returns.
In simple words, CAGR shows the average yearly growth rate of your investment if it grew at a steady rate and helps you choose better funds for long-term goals. For systematic investment plans, however, the XIRR method is usually more precise. You can learn more about the differences between these two in our detailed XIRR vs CAGR guide.
Difference Between Absolute Returns and CAGR in Mutual Funds
Absolute Return tells you how much your investment has grown in total, without looking at how long it took. It’s a straight percentage gain or loss.
Example: If you invest ₹10,000 and it becomes ₹12,000, your absolute return is 20%.
A CAGR, on the other hand, tells you how much your investment has grown every year, on average, considering compounding and the time period.
Using the same example: If ₹10,000 becomes ₹12,000 in 2 years, the CAGR is around 9.5% per year.
Conclusion
CAGR helps you understand how your mutual fund investment has grown steadily over time. It shows the average yearly return, even if the market had ups and downs.
“What is CAGR?” is a key question every investor should explore. Knowing how it works can help you compare funds, track your progress, and make better investment choices. If you stay invested for the long term and stay consistent, your money can grow well over time.
FAQs
1. What is a good CAGR for mutual funds?
A good return from mutual funds depends on the type you invest in. Equity funds generally offer higher growth if you stay invested for the long term. Debt funds grow slower but are relatively stable and suited for short-term or low-risk goals. Pick based on your time horizon and comfort with market ups and downs.
2. Is higher CAGR better?
A higher CAGR can mean better growth, but it’s important to also look at the risk and consistency of returns.
3. What is CAGR with example?
CAGR shows the average yearly growth of your money.
Example: If ₹10,000 grows to ₹15,000 in 5 years, the CAGR is about 8.45% per year.
4. Why is CAGR important?
CAGR helps you see how your investment has grown steadily each year, making it easier to compare funds over time.
5. How do you convert CAGR to annual growth?
You don’t need to convert it. CAGR already tells you the yearly average growth of your investment.
Disclaimers
Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.
These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
