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CAGR Calculator
When we start investing in the financial markets, the first question that comes to our minds is that how much return will I get if I invest this much amount annually one any of the financial products. So, in order to determine this, we calculate Compound Annual Growth Rate (CAGR).
Are you wondering that this might involve to some tough mathematical formula? Yes, it does. But don’t worry for that we have CAGR Calculator that helps us in calculating our return on investments annually. But before calculating that, you should know basics about this concept.
What is meant by Compound Interest?
Firstly, we need to understand what compound interest means, to understand the concept of CAGR. In financial terms, when we calculate simple interest, we only calculate on the amount invested. But when we calculate compound interest, we take the interest as well the amount invested.
So, we can say that it is the interest earned on interest. This is the reason it is said that the longer we hold a financial product, the greater we benefit from compound interest, and the faster our money will grow.
What CAGR means?
Basically, CAGR tells us how much we have earned on our investments annually during a particular period. This helps us to determine whether our investment returns rise or fall during a particular period.
If we own a business then CAGR tells us if our business if growing and the profits that are generated, are properly invested. With the help of CAGR calculator we can determine, our true investment returns annually.
Before we discuss how CAGR is calculated let us discuss the difference between simple growth rate and compounded growth rate:
Difference between Simple Growth Rate and Compound Annual Growth Rate:
A simple growth rate indicates how an investment will produce throughout its time horizon. The compound annual growth rate, on the other hand, depicts the typical rate of return necessary for an investment to increase from its starting balance to its end balance during the given period on an annual basis.
What the investment's time horizon is doesn't matter when calculating CAGR. Notably, the compounded annual growth rate allows you to evaluate investments over a range of time horizons, in contrast to the simple growth rate.
This difference can be seen in the following formulas:
Formula of Simple Growth Rate
The formula of Simple Growth Rate-
Simple Growth Rate= (Future Value-Present Value)/Present Value * 100
Suppose we invested Rs. 15000 in the year 2019, and we got investment amount of Rs. 20000 in the year 2022, then the Simple Growth Rate = (20,000-15,000)/15000*100 = 33.33%
Now let us go to calculation of CAGR
Formula of CAGR
The formula of CAGR-
CAGR = {(Future Value/Present Value) ^1/t}-1 where t= annually time period
With the same example, then the CAGR will be {(20,000/15,000) ^1/3}-1= 10.06%
totally agree with you that this calculation is quite complex, this is the reason that Elearnmarkets has developed CAGR calculator, to make the calculation easy.
How to use CAGR Calculator Online?
With the help of Elearnmarkets CAGR calculator online, we can easily calculate the CAGR in just 3 steps:
1. Enter the value of initial investment 2. Enter the future value of investment 3. Enter the Investment Period and then click on “calculate now”
The result will appear as following:
Now, having understood what is CAGR and how it is calculated, let us discuss some FAQs on the same.
Is a CAGR of 5% good?
When we invest in stocks or mutual funds, then a CAGR between 15%-20% with time period of 5 years, is consider to be good.
What does a CAGR tell you?
CAGR tells us the growth rate of our investment over a period compounded annually.
What does 10% CAGR mean?
It means that our investment grew 10% annually over a specific period of time. So, if we invested Rs. 15,000 then it needs to grow at the rate of 10% to become Rs. 20,000 at the end of 3 years.
What does 3-year CAGR mean?
In simple terms, it means that how many years it will take for an investment to grow from Rs. 15,000 to Rs. 20,0000 at the rate of 10%.
Should CAGR be high or low?
A high CAGR is better compared to low CAGR as it indicated better returns on our investment. So, if we compare 7% to 10% CAGR. Then the 10% CAGR will be better.
