Question 1

What is CAGR and why is it important?

Accepted Answer

CAGR (Compound Annual Growth Rate) shows the average annual growth rate of your investment over a specified period, assuming profits are reinvested. It's important because it smooths out volatility and gives you a single percentage that represents consistent growth, making it easier to compare different investments.

Question 2

What's the difference between absolute return and CAGR?

Accepted Answer

Absolute return is the total percentage gain without considering time: (Final Value - Initial Value) / Initial Value × 100. CAGR factors in time and compounding. For example, 100% return over 1 year is great, but over 10 years it's mediocre. CAGR normalizes returns across different time periods for fair comparison.

Question 3

What is a good CAGR for equity investments in India?

Accepted Answer

Historically, Indian equity markets (Nifty 50) have delivered 12-15% CAGR over 15-20 year periods. Good equity mutual funds achieve 15-18% CAGR. Individual stocks can deliver 20%+ CAGR, but with higher risk. Any investment consistently beating 15% CAGR is excellent. Don't chase unrealistic 30-40% CAGR promises.

Question 4

Should I include dividends when calculating returns?

Accepted Answer

Absolutely yes! Dividends are part of your total returns. Ignoring them understates your investment performance, especially in dividend-paying stocks or mutual funds. Always calculate 'total returns' which include both capital appreciation and dividend income for accurate performance measurement.

Question 5

How do I compare returns from different investments?

Accepted Answer

Use CAGR for time-normalized comparison. Convert all returns to CAGR first, then compare. Also consider: 1) Risk taken (higher returns often = higher risk), 2) Liquidity (can you exit easily?), 3) Tax implications, 4) Investment horizon. Don't just chase highest CAGR without understanding risk.

Question 6

What if I made multiple investments at different times?

Accepted Answer

For investments made at different times, use XIRR (Extended Internal Rate of Return) instead of CAGR. XIRR accounts for multiple cash inflows/outflows at different dates. Use our XIRR Calculator for such scenarios. CAGR works best for single lumpsum investments.

Question 7

How do I factor in inflation when calculating returns?

Accepted Answer

Calculate 'real returns' by subtracting inflation from nominal returns. Real Return = Nominal Return - Inflation Rate. For example, 12% nominal return with 6% inflation = 6% real return. Real returns show your actual purchasing power growth, which is what truly matters for wealth building.

Question 8

Can negative returns have a CAGR?

Accepted Answer

Yes. If your investment lost value, CAGR will be negative, showing the average annual rate of decline. For example, ₹1 lakh becoming ₹80,000 in 3 years = -6.9% CAGR. This helps you quantify losses accurately and make informed decisions about exiting underperforming investments.

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