CAGR smooths the journey into one number
CAGR stands for compound annual growth rate. It shows the annualised return that would turn a starting value into an ending value over a period of time. A 5-year CAGR is not the return earned every single year. It is the average annual compound rate across the full period.
This is useful because fund performance rarely moves in a straight line. A fund might gain strongly one year, fall the next year, and recover later. CAGR turns that uneven journey into a cleaner comparison number.
A 3-year CAGR can help you understand recent medium-term performance. A 5-year CAGR usually gives more context because it covers a longer period. The longer period may include more market conditions, which can make the number less dependent on one unusually good or bad year.
But CAGR does not show the bumps along the way. Two funds can have the same 5-year CAGR, while one had a smoother path and the other had large falls. That is why CAGR should be read alongside volatility, drawdowns, risk rating and the fund's asset mix.
How to use it
CAGR is a useful comparison tool, but it is not a suitability test by itself.
- Use CAGR to compare funds over the same time period.
- Check whether one strong year is driving the result.
- Compare return with risk and volatility.
- Look at 1, 3 and 5 year periods together where available.
- Remember that past performance does not guarantee future returns.