CAGR

CAGR (compound annual growth rate) is the constant yearly rate at which an investment would have had to grow, with compounding, to get from its starting value to its ending value over a given period. It smooths a lumpy multi-year journey into a single comparable percentage — which is exactly why backtest reports lead with it.

Formula

CAGR = (Ending value ÷ Beginning value)^(1 ÷ years) − 1

Hypothetical example: a systematic NSE equity strategy grows ₹5,00,000 into ₹9,20,000 over 4 years.

CAGR = (9,20,000 ÷ 5,00,000)^(1/4) − 1 = (1.84)^0.25 − 1 ≈ 16.5% per year

Note what CAGR hides: the path. The same ₹9,20,000 could have arrived via four steady years or via +80%, −30%, +40%, −5%. Both paths share one CAGR; they do not share the same drawdowns or the same odds you’d have stayed invested through them. Also beware annualizing short windows — a lucky three-month backtest “annualized” into a headline CAGR is marketing, not measurement.

Why it matters

For algo traders, CAGR is the numerator of most quality metrics: return-to-max-drawdown compares it against the worst dip, and the Sharpe ratio compares excess return against volatility. Comparing strategies on CAGR alone rewards recklessness — the honest comparison is CAGR at a given level of risk, measured over a sample long enough to include at least one bad regime for the strategy’s style.

In INDfolio AI, CAGR appears in every backtest report next to drawdown and Sharpe so returns are never read in isolation — see Backtesting.