The CAGR or the compound annual growth rate also referred to as the compounded annualized growth rate or annualized return is the standard way of visualizing growth of an investment in a volatile instrument such as gold, debt fund, equity fund or stocks.
The CAGR return replaces volatile annual returns by a single return. That is all the volatility is swept under the carpet (averaged out, technically) and single return which represents compounded growth is presented.
Or in other words, we find out the return assuming the instrument offers compound interest. This is merely a representation of growth and not how the investment has grown in value year upon year.
Here is a 5-minute video to clarify what the CAGR stands for.
A detailed explanation can be found here:
What is Compound Annual Growth Rate (CAGR)? Part I: Lump Sum Investing
Understanding the Nature of Stock Market Returns
If you want to know more about XIRR, check this out: What is XIRR? (video coming soon)
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!