What is CAGR?
CAGR stands for Compound Annual Growth Rate. It is the measure of an investment's annual growth rate over time, assuming that any profits were reinvested at the end of each year of the investment's lifespan. It is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
Absolute Return vs. CAGR
Absolute Return simply measures the total percentage gained or lost on an investment, regardless of how long it took to achieve that return. For instance, if an investment of ₹1,00,000 becomes ₹1,50,000, the absolute return is 50%.
CAGR, on the other hand, accounts for the time value of money. If those same 50% returns took 10 years to achieve, the CAGR is a much more modest 4.1%. By accounting for time, CAGR provides a smoothed-out annualized rate, which makes it perfect for comparing different investments.