Compound Annual Growth Rate (CAGR)
CAGR (Compound Annual Growth Rate) represents the constant annual rate at which an investment would have grown if it grew at a steady rate each year with compounding.
Formula
$$\text{CAGR} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1$$ (where $n$ is the number of years)
Why CAGR Matters
- Smoothes Volatility: Eliminates the noise of annual market fluctuations.
- Fair Comparison: Allows you to compare returns of different asset classes (e.g. Mutual Funds vs Real Estate vs FD) over identical time periods.