Investor Corner/Building and judging a portfolio/Performance Measurement
3.2.1 CAGR
CAGR, or Compound Annual Growth Rate, is the smoothed annual return that would take an investment from its starting value to its ending value over a multi-year period, ignoring how bumpy the actual path was.
A smoothed, hindsight figure
If ₹1 lakh grows to ₹2 lakh over six years, the CAGR is the single steady annual rate that would produce that same doubling, close to 12% in this case. The actual year-by-year path almost certainly did not move at a constant 12%; some years likely rose more, others less, and some may have fallen. CAGR flattens all of that into one convenient, comparable number.
Why it works well for lump sums, and poorly for SIPs
CAGR is a fair and appropriate measure when a single lump sum was invested at one point in time and held to a specific end date. It becomes misleading for a SIP or any series of contributions made at different times, since it cannot properly account for money that entered the investment at different points along the way. XIRR exists specifically to handle that more complex situation correctly.
Reading a quoted CAGR carefully
A fund's advertised CAGR depends heavily on which start and end dates were chosen for the calculation, and providers can sometimes select a favourable window without being technically dishonest about it. Checking CAGR over several different periods, rather than trusting a single quoted figure, gives a far more reliable picture of consistency.
How PriLytics helps. For a single lump sum, PriLytics shows the actual value trajectory over time; for anything involving multiple contributions, it computes proper XIRR instead of a misleading CAGR. See how returns are calculated.