CAGR vs Absolute Return: The Confusion That Costs Crores
Real estate agents love saying "your property doubled in 7 years!" Sounds impressive. CAGR? Just 10.4%. Mutual funds love advertising "200% returns since launch." Over 12 years, that is just 9.7% CAGR — barely beating inflation. Banks love showing "4% interest" — but that is annual. The compounded effective rate after tax can be just 2-3%. CAGR (Compounded Annual Growth Rate) cuts through marketing noise and reveals the true annualized performance. Train your brain to ask "What is the CAGR?" every time you see investment claims.
The Rule of 72 (Memorize This)
Want to know how fast your money doubles? Divide 72 by the CAGR. 8% CAGR = doubles in 9 years. 12% CAGR = 6 years. 15% CAGR = 4.8 years. This single rule lets you do mental math at parties when someone brags about their investment. If they cannot explain how their money supposedly doubled in 3 years (which would require 26% CAGR — extremely rare), be skeptical. The Rule of 72 is your ultimate BS detector for investment claims.
Realistic CAGR Expectations in India
Long-term realistic CAGR for various assets in India: Savings account 3%, FDs 6-7%, PPF 7-8%, Gold 8-9%, Real Estate 6-9%, Equity Mutual Funds 11-13%, Direct Stocks (with skill) 13-16%, Small/Mid Cap Funds 14-17%. Anyone promising 25%+ guaranteed CAGR is selling fantasy. Even Warren Buffett has averaged about 20% CAGR. Use these benchmarks to evaluate any investment claim. Higher than these = either exceptional skill (rare) or scam (common).
Tax-Adjusted CAGR (The Number That Actually Matters)
A pre-tax CAGR of 12% on equity becomes 10.8% after 10% LTCG tax. A pre-tax CAGR of 7% on FDs in 30% bracket becomes just 4.9% after tax. PPF's 7.1% remains 7.1% (tax-free). Suddenly the picture changes. PPF often beats equity for high-tax-bracket Indians on a tax-adjusted basis for short horizons. For long-term wealth building (15+ years), equity still wins because compounding has more years to work. Always calculate post-tax CAGR for honest comparisons.