CAGR (Compound Annual Growth Rate) represents the rate at which an investment would have grown if it had grown at a steady rate every year. It smooths out volatile year-to-year returns into a single annualized figure, making it easy to compare different investments.
CAGR = (Final Value / Initial Value)^(1/n) − 1, where n is the number of years. For example, if ₹1 lakh grew to ₹3 lakh in 5 years, CAGR = (3,00,000/1,00,000)^(1/5) − 1 = 24.57%.
CAGR doesn't reflect investment risk or volatility. Two investments can have the same CAGR but very different risk profiles. It also doesn't account for interim cash flows (SIPs, withdrawals) — for those, use XIRR instead.