CAGR vs absolute return

The two formulas

Absolute return = (End − Start) ÷ Start
CAGR            = (End ÷ Start)^(1 ÷ Years) − 1

Both use the same two values. The difference is time: absolute return ignores it, CAGR spreads the gain across the years it took. ₹1,00,000 growing to ₹1,80,000 is an absolute return of80% whether it took one year or ten.

Why an 80% gain can lose to a 60% gain

Fund B made more in total, but only because it had twice as long. Per year, Fund A grew much faster. Absolute returns can only be compared when the periods are identical; CAGR puts any two periods on the same scale.

Same gain, different speeds

When to use each

• Periods under one year → absolute return. Annualising short periods is misleading: a 5% gain in two months annualises to 34%. In India, mutual fund disclosures generally show absolute returns for periods under a year and CAGR beyond that.
• Comparing investments over different lengths → CAGR.
• Answering “how much did I make in total?” → absolute return. It is the number that matters for a specific goal.
• Investments with regular deposits (SIPs) → neither. Use XIRR.

The best practice is to report both: absolute return for the outcome, CAGR for the pace. The CAGR calculator shows both from the same inputs, and thestock CAGR calculator adds dividends to give total-return figures.

Converting between them

• Absolute → CAGR: 80% over 5 years → 1.8^(1/5) − 1 = 12.47%
• CAGR → absolute: 12% for 5 years → 1.12^5 − 1 = 76.23%

Don’t divide the absolute return by the number of years — 80% ÷ 5 = 16% ignores compounding and overstates the yearly rate. The how to calculate CAGR guide covers this and other common mistakes.

Sources and further reading

• Wikipedia: Rate of return — holding-period vs annualised returns
• Investor.gov (U.S. SEC): Compound interest calculator
• Wikipedia: Compound annual growth rate

Educational information only — not investment advice. Past performance does not guarantee future results.