Question 1

What is CAGR?

Accepted Answer

CAGR (Compound Annual Growth Rate) is the rate at which an investment grows from its initial value to its final value over a given period, assuming the profits are reinvested each year. It smooths out annual fluctuations to give a single comparable growth rate.

Question 2

How is CAGR calculated?

Accepted Answer

CAGR = (End Value / Start Value)^(1/Years) - 1. Multiply by 100 for percentage. For example, Rs 1L growing to Rs 2.5L in 5 years: CAGR = (2.5)^(1/5) - 1 = 20.1%.

Question 3

What is the difference between CAGR and absolute return?

Accepted Answer

Absolute return is the total percentage gain: ((End - Start) / Start) x 100. It does not account for time. CAGR normalizes this across years, making comparison between investments of different tenures meaningful.

Question 4

What is a good CAGR for mutual funds in India?

Accepted Answer

Large-cap index funds have delivered 11-13% CAGR over 10+ years. Active large-cap funds, 11-14%. Mid-cap funds, 14-18%. Small-cap funds, 16-22%. These are historical figures. Past performance does not guarantee future returns.

Question 5

What is XIRR and how is it different from CAGR?

Accepted Answer

XIRR (Extended Internal Rate of Return) is used for irregular cash flows like SIPs. CAGR is for point-to-point returns on a single investment. Most mutual fund performance data uses XIRR for SIP returns and CAGR for lumpsum or scheme returns.

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