Why CAGR hides volatility
How two investments can share a CAGR while having very different, bumpier journeys.
CAGR only ever looks at two numbers: where an investment started, and where it ended up, plus how many years in between. It has no idea what happened along the way — which means two investments with wildly different, bumpier journeys can report the exact same CAGR, as long as they share the same start, end, and duration.
Same CAGR, two completely different rides
Both funds start at ₹5,00,000 and end at ₹10,00,000 after 5 years — using the real computeCagr formula, both report an identical 14.87% CAGR. Fund A gets there smoothly: ₹5,00,000 → ₹5,74,349 → ₹6,59,754 → ₹7,57,858 → ₹8,70,551 → ₹10,00,000, gaining a steady ~14.9% every single year. Fund Bgets to the identical ending value on a completely different path: +40% → −20% → +35% → −15% → +55.6%, landing on ₹7,00,000 → ₹5,60,000 → ₹7,56,000 → ₹6,42,600 → ₹10,00,000. Same start, same end, same CAGR — one path never deviated from the average, the other swung between a 20% loss and a 55% gain along the way.
Work out the compound annual growth rate between two values.
Why it matters if you don’t hold to the exact end date
If both investors held for the full 5 years, the CAGR figure was accurate for both — they really did end up in the same place. The gap shows up the moment either investor needs the money before that exact end date.
At year 2, Fund A’s steady investor is sitting on ₹6,59,754. Fund B’s investor, who just went through that −20% year, is sitting on only ₹5,60,000 — a ₹99,754 gap, purely from needing to exit at a different point in each fund’s very different journey. The 14.87% CAGR headline never warned either investor that this gap could exist, because it only describes the beginning and the end.
This is closely related to sequence-of-returns risk — the same idea, applied specifically to what happens when withdrawals (rather than a single early exit) collide with a bad stretch inside an otherwise-average-looking return history.
What to check alongside CAGR
None of this makes CAGR a bad number — it’s still the right way to compare two investments’ overall growth on an apples-to-apples, per-year basis. It just answers a narrower question than it sounds like it does. Before assuming a fund’s CAGR describes what your specific holding period will feel like, it’s worth checking the fund’s year-by-year returns (not just its headline CAGR) for how volatile the actual path has historically been, especially if there’s any real chance you’ll need to exit before your original planned horizon.
All figures are indicative and for educational purposes only — not financial advice.
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