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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)
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About the Author
M. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.Content Policy
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