CAGR (Compound Annual Growth Rate) shows up on every mutual fund factsheet, but it's often misread as "the average return you earned each year" — which isn't quite what it measures.
What CAGR actually calculates
CAGR answers a specific question: if your investment had grown at a perfectly smooth, constant rate every single year (no ups and downs) to go from its starting value to its ending value over the period, what would that constant rate have been? It's a smoothed-out, hypothetical steady rate — not a measurement of what happened in any individual year.
Why it differs from average annual return
Simple average return just adds up each year's percentage return and divides by the number of years — but this method can be misleading with volatile returns, because a big loss followed by an equally-sized percentage gain doesn't bring you back to even (a 50% loss needs a 100% gain to recover, not another 50%). CAGR accounts for this compounding reality, which is why it's almost always lower than the simple average of the same year-by-year returns for a volatile investment.
Calculate it yourself
A CAGR calculator needs just three inputs — starting value, ending value, and the number of years — to give you the smoothed annual rate, without needing every individual year's return.
What CAGR doesn't tell you
CAGR hides volatility entirely — two investments with wildly different year-to-year swings can show the identical CAGR if their start and end values match. It's a useful summary number for comparing investments over the same period, but it says nothing about how bumpy the ride was to get there.
The bottom line
Use CAGR to compare the overall growth of different investments fairly over the same timeframe — but don't mistake it for a description of what any single year actually looked like.
Try it yourself
Put this into practice with our CAGR calculator.