The formula: (final ÷ initial)^(1/years) − 1
For an investment growing from ₹1,00,000 to ₹2,00,000 over 5 years: (2,00,000 ÷ 1,00,000)^(1/5) − 1 = 2^0.2 − 1 ≈ 14.87%. This is the single annual growth rate that, compounded every year for 5 years, would produce exactly a doubling.
A shorter holding period, smaller total growth
An investment growing from ₹1,00,000 to ₹1,50,000 over 3 years — 50% total growth, less than the first example's 100% — still works out to a similar CAGR of 14.47%, because it happened over fewer years. CAGR normalizes for the length of the holding period, so different total growth amounts over different timeframes can still land close to the same annualized rate.
Why CAGR isn't the same as total growth
Total growth (100% in the first example, 50% in the second) just compares the start and end values directly, with no reference to time. CAGR answers a different question — what constant yearly rate produced that total growth — which is why a smaller total growth over a shorter period can annualize to almost the same rate as a larger total growth over a longer one.
What CAGR assumes
CAGR assumes smooth, consistent growth every year — actual year-to-year returns almost always vary even when the CAGR works out the same, a distinction explored further in the companion article on average return versus CAGR.