Short Description for CAGR
Compounded Annual Growth Rate (CAGR) is rate of growth of an investment year-on-year over specified period of time.
The rate calculator is used to calculate what your principal would grow to if your interest earned is invested back at the same rate.
For instance, if you invest Rs 100 at 10% then you will receive Rs 10 as interest at the end of the first year. But at the end of second year, you will earn interest on Rs 100+ Rs 10. This amount to Rs 110 and interest would be 11 and not 10 as at the end of the first year.
Why is CAGR used?
CAGR is mostly used in businesses to calculate growth rate of revenues and profits over a given period of time.
CAGR finds importance when one is looking to purchase a particular stock and possess all details including its historic revenues and profits available. The rate at which company has grown in those years comes out through calculation.
You can even make out what sum would you have at a particular future date if you invest ‘x’ amount of money now at a given interest rate.
So, in the example mentioned above Rs 100 will become Rs 121 in 2 years time at a CAGR of 10%.
However, it must also be mentioned at the end that CAGR is not the actual return in reality and only predicts what you investment would be at certain period in time if growing at a particular interest rate. It may also be explained as smooth annualized gain over certain time period at given rate of interest.