The CAGR calculation formula is:
CAGR = {[(Ending Value / Beginning Value) ^ (1/n)] – 1} * 100
Here, n represents the investment tenure.
For example, if you invested Rs. 5,000 and it grew to Rs. 10,000 over 5 years, this would be:
CAGR = {[(10,000/5,000) ^ 1/5)] – 1}*100
This comes to a CAGR of 14.87%, meaning your investment would have grown at an average rate of 14.87% each year to bring your corpus to Rs. 10,000 over five years.
Instead of manual calculations, a CAGR calculator online simplifies this process, saving time and enhancing accuracy.
Limitations of CAGR
Here are a few limitations of CAGR:
Assumes consistent growth: CAGR assumes a steady, consistent growth rate over the entire period, which is often unrealistic in real-world scenarios.
Ignores volatility: It doesn't account for fluctuations or volatility in the value of the investment during the period, potentially overlooking significant ups and downs.
Excludes external factors: CAGR doesn't reflect changes in the market environment, such as economic events or external influences, that could affect growth.
Simplifies investment performance: While useful, CAGR simplifies the investment’s performance and may not capture the full risk or variability involved.
Doesn't account for timing: It doesn’t take into consideration when gains or losses occurred within the period, which may be critical in assessing the true performance.
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