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Investors often face a common challenge: how to compare returns from different financial products like SIPs, fixed deposits, and other instruments. These products display returns in varying formats, making direct comparison difficult. 

One reliable way to resolve this is by using Compound Annual Growth Rate (CAGR), which provides a standardised method of evaluating returns. With the right tools, like a CAGR Calculator, even beginners can compare investments confidently and make informed decisions based on long-term performance.

Why Comparing Investment Returns Can Be Confusing 

Investments differ not only in nature but also in how they present returns. Fixed deposits usually show returns in percentage terms over a specific period. SIPs reflect gains based on market fluctuations and monthly contributions, often measured using XIRR or total value. 

Mutual funds may present absolute or annualised returns. This inconsistency confuses investors when trying to determine which option is better. CAGR addresses this problem by offering a single, annualised return rate, helping investors make more consistent, like-for-like comparisons across all instruments, irrespective of investment type or duration.

What is CAGR and Why Does it Matter 

CAGR, or Compound Annual Growth Rate, measures how much an investment grows annually over a set period. Unlike simple returns, it accounts for compounding and provides a smoothed-out yearly growth rate, even when returns vary year to year. This becomes especially useful when comparing instruments like SIPs and FDs, which behave differently. 

CAGR answers the essential question: “If my money grew at a steady rate each year, what would that rate be?” It helps remove temporary market volatility or short-term fluctuations from the equation and presents a clear picture of long-term performance. For investors with long horizons, CAGR is a more realistic measure of wealth creation potential than absolute returns.

Understand the Basic CAGR Formula

CAGR is calculated using a simple formula:

CAGR = [(Final Value / Initial Investment)^(1 / Number of Years)] - 1

This shows how much your investment grew annually over the selected period. It gives you a realistic picture of performance by accounting for compounding. For example, if you invested ₹1,00,000 and it became ₹1,50,000 in 3 years, CAGR tells you the annual rate at which this happened, removing the confusion of inconsistent growth.

Calculating CAGR for Fixed Deposits

Fixed Deposits (FDs) are lump-sum investments made for a fixed period at a predefined interest rate. Because the interest is compounded and predictable, calculating CAGR becomes straightforward.

How to Calculate

Use the standard CAGR formula:

CAGR = [(Final Value / Initial Investment) ^ (1 / Number of Years)] - 1

Example:

Suppose you invest ₹1,00,000 in a fixed deposit for 5 years at 7% annual interest (compounded annually).

• Initial Investment: ₹1,00,000

• Interest Rate: 7% per annum

• Tenure: 5 years

• Final Value: ₹1,40,255 (as per compound interest)

Now apply the formula:

• CAGR = [(1,40,255 / 1,00,000) ^ (1/5)] - 1

• CAGR = (1.40255) ^ 0.2 - 1

• CAGR ≈ 7%

This confirms the interest rate.

Things to Consider

• Compounding frequency: Annual, quarterly, or monthly—this impacts your final amount.

• Reinvestment of interest: It ensures true compounding.

• Use of tools: An online FD Calculator automates this calculation and reduces the chances of manual error.

Tip: Always compare CAGR instead of just interest rates to get a fair idea of returns from different FDs or other fixed-income options.

Applying CAGR to SIP Investments

Systematic Investment Plans (SIPs) involve investing a fixed amount regularly (usually monthly) into mutual funds. Since the investment is staggered, calculating CAGR requires extra care.

Why It’s Complex

Each SIP instalment has a different investment period. For example, a SIP made today will remain invested longer than one made next year. This staggered nature complicates return calculation.

How to Approach It

To estimate CAGR for SIPs:

Calculate the total invested amount.

Determine the current or expected final value.

Estimate the average investment period (usually considered half the total tenure).

Apply the CAGR formula.

Example:

Let’s assume:

• You invest ₹5,000 monthly for 5 years (i.e. ₹3,00,000 total)

• The investment grows to ₹4,00,000 in 5 years

• Average investment period = 2.5 years (approx.)

Now apply the formula

• CAGR = [(4,00,000 / 3,00,000) ^ (1 / 2.5)] - 1

• CAGR = (1.3333) ^ 0.4 - 1

• CAGR ≈ 12%

This means your SIP gave a 12% average annual return.

Helpful Tools

Use an SIP calculator online to:

Enter the monthly investment

Set expected return rate

Select tenure

It will automatically compute the final corpus and assist you in calculating CAGR more accurately.

Tips to Improve Accuracy

• Consider the mid-point investment duration (for SIPs).

• Use real-time NAV or portfolio value for up-to-date final value.

• Combine the SIP and CAGR tools for the best results.

Comparing CAGR Across Other Investments

Once you understand how to calculate CAGR for FDs and SIPs, the next step is to compare returns across different types of investments. This gives you a clear picture of which investment has delivered better annualised growth.

How to Compare Investments Using CAGR

Use CAGR as a common metric for comparison. Whether you're evaluating mutual funds, stocks, recurring deposits, or fixed deposits, CAGR helps normalise growth across different timeframes.

Example Comparison:

Let’s say you invested in three products over 5 years:

From the above table, while both SIP and stocks returned ~12%, SIPs may be considered more consistent and diversified, which can be favourable for risk-averse investors.

Points to Remember

• Always use identical timeframes for comparison.

• Higher CAGR doesn’t always mean better—it also reflects higher risk.

• Check the consistency of returns if investing in market-linked instruments.

CAGR allows you to look beyond just final returns and truly evaluate annualised performance.

Conclusion

Comparing different investment options is easier when you use CAGR as a common metric. It helps standardise returns across products like SIPs, FDs, and stocks, revealing how much your money grows annually. By using reliable tools, investors can accurately analyse long-term performance and make smart, informed choices. 

Moreover, instead of doing everything manually or switching between tools, use a modern Investment App that combines all these features. These apps often include calculators for SIPs, FDs, and CAGR — all in one place.

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