CAGR (Compound Annual Growth Rate) is a rate which shows how much a person’s investment grows over a specific period. In other words, it is the average returns an investor has earned on the investments after a given interval say one year.
This tool is very important because it helps in comparing two different returns from two investments, you can calculate how much an investment has returned per year on compounded basis, It's just the opposite of Compound Interest.
A = Final amount
P = amount invested
n = Number of years
CAGR can be a great tool to compare two different investments and there returns.
A. 10,000 invested in a XYZ mutual fund for 2 yrs became 20,000
B. 50,000 invested in GOLD for 7 years became 4,00,000
The compound annual growth rate (CAGR) are applied at various places of personal finance. It is often used to calculate the average growth of single investment over a certain period. CAGR can be applied in comparing return on equity with bonds or saving accounts. Further, it can be used to compare the performance of two companies and forecasting their future growth based on their historical data.