Scripbox's CAGR calculator is an online tool that can help you analyze your investment decision and helps calculate Compound Annual Growth Rate depending on the data entered by the user.
What is the Compound Annual Growth Rate (CAGR)?
Compounded Annual Growth Rate (CAGR) is the rate of return that would be required for an investment to grow from the initial value invested to the maturity balance. However, CAGR assumes that the gains are reinvested at the end of each investment period.
You can calculate the Compound Annual Growth Rate using the following formula:
CAGR = [(Ending value/Beginning Value)^(1/N)]-1
Lets understand the calculation with the help of the following example:
Suppose the beginning value of the investment is Rs 10,000 and the ending value of the investment is Rs. 14,000 over a period of 2 years.
CAGR = [(14,000/10,000)^(1/2)] -1 = 18.32%
What is a CAGR Calculator?
The online CAGR calculator is an easy tool to analyze the returns.
If your mutual fund investment value increases over time, you can use the calculator and estimate the rate of return on your investment.
Thus, the online CAGR calculator provides you with the annual growth rate that you can use to compare with a benchmark return prevailing in the market.
How to Use Scripbox’s CAGR Calculator?
Scripbox’s CAGR calculator is an online tool that can help you analyze your investment decision and helps calculate Compound Annual Growth Rate depending on the basis of input data.
The following steps will help you navigate through the Scripbox’s Online CAGR calculator:
Step1: Select the type of rate of return from the dropdown
Step2: Enter the initial value of the investment
Step3: Enter the final value of the investment
Step4: Enter the number of years of investment
Click on submit after entering the above information, the CAGR calculator will automatically show you the CAGR on the basis of the input data.
Benefits of Using an Online CAGR Calculator
Scripbox’s CAGR calculator helps an investor to calculate CAGR on their investments which in turn will help them in analyzing their investment decisions.
Following are a few other benefits of using a CAGR calculator.
- It helps the investors to evaluate the returns in various scenarios. Furthermore, investors can use several test cases to evaluate returns in different scenarios. Since the calculator works on input data, there is no possibility of the outcome being incorrect.
- It is simple and easy to use. The investors only need to enter the beginning value, ending value and the investment period and the online calculator will do the rest.
- In practical scenarios, suppose the investor had purchased some units of an equity fund at some point in time whose value has increased now. With the help of the CAGR online calculator, investors can find out the rate of return on the investment.
Compounded annual growth rate, or CAGR, in simple terms, is the rate of return that would be required for an investment to grow from the initial value invested to the maturity balance. However, it is assumed that the gains are reinvested at the end of each investment period.
Following is the formula to calculate CAGR:
CAGR = [(Ending value/Beginning Value)^(1/N)]-1
Comparison of CAGR with Simple Interest
The following table highlights the key differences between CAGR and simple interest.
|Meaning||It is the sum that the borrower pays during the loan period.||Compound annual growth rate, or CAGR, in simple terms, is the rate of return that would be required for an investment to grow from the initial value invested to the maturity balance.|
|Levy||It is levied only on the principal amount||It is levied on both principal and interest amount|
|Formula used||Simple interest: Principal*Interest*No. of periods||Compound interest: [(Ending value/Beginning Value)^(1/N)]-1|
|Growth||Growth is steady as the interest is levied on the principal amount||Growth is at an increased pace since interest is levied on both principal & interest.|
Frequently Asked Questions
Compound interest, in simple terms, is interest on interest, meaning adding the interest amount to the original principal amount.
There is no specific percentage that qualifies as a good CAGR. The CAGR for equity and debt investments can be quite different.
A 5-year CAGR percentage indicates how much the investment has grown in the past 5 years.
10% CAGR means you earn 10% return on your investment every year. Simply put, it is the average rate at which your investment will grow during the investment tenure.
CAGR is a more accurate way of calculating and determining the returns of an investment, the value of which changes over time. Investors can compare the 2 investment options of the same category or a market index using CAGR.
But CAGR does not account for the risk factor. CAGR can prove to be a useful tool to compare 2 alternatives but not considering the risk associated with both.
Thus, it is advisable to use the CAGR approach wisely and to account for the risk adjustment before taking any investment decisions.
Investment decisions taken on the basis of CAGR can go wrong if the investors do not have proper knowledge about its limitations. Following are some of the limitations of using CAGR:
CAGR works on the beginning, ending value, and the number of investments. The formula assumes that there will be no change in the growth rate (interest rate) during the period of time and hence ignores volatility.
You cannot use CAGR in the case of SIP mode of investments as the formula considers only the beginning value for calculation purposes. Hence it is suitable for lump-sum payments only.
You cannot use CAGR as a stand-alone metric for your investment decisions. For example, in the case of equity investments, the Sharpe ratio is considered a better metric as it also takes the impact of risk-adjusted returns.