FULL FORM OF CAGR

 FULL FORM OF CAGR

Full form of CAGR is Compound Annual Growth Rate. It is the rate of return that would be required for an investment to grow from its initial balance to its ending balance. Hence it is the instrument of measuring of growth of invested amount. CAGR may be both positive and negative. If the invested amount has increased the CAGR will be positive and if the invested amount has decreased the CAGR may be negative.

So CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over a period of time. It is the tool for the investors to evaluate the CAGR of two alternative investment and choose the best one for their investment. CAGR does not reflect investment risks.

FORMULA FOR CALCULATION OF CAGR

CAGR = (EV/BV) 1/n  -1

Where EV = Ending value 

           BV = Beginning value

           n = Number of years

 HOW TO USE CAGR

Suppose anyone has invested Rupees 10,000 in a portfolio with the following returns.

• From Jan 1 2015 to Jan1 2016 invested amount grew to 13,000 (30% in year one)
• From Jan 1 2016 to Jan 1 2017 invested amount grew to 14,000 (7.69%)
• From Jan 1 2017 to Jan 1 2018 invested amount grew to 19,000 (35.71%)

Hence it is evident that the year to year growth rate is different. Such as in first year growth is 30%,in second year growth is 7.69% and in third year growth is 35.71%.

CAGR = (EV/BV) 1/n -1

            = (19,000/10,000) 1/3 -1

            = 23.86%