The Compound Annual Growth Rate (CAGR) is the most commonly used metric to measure investment performance over time. It represents the geometric progression ratio that provides a constant rate of return over the investment period. CAGR is widely used for mutual funds, stocks, and business metrics to compare the historical performance of investments.

Absolute returns simply show the total percentage gain without considering the time factor. CAGR provides a more meaningful comparison by annualizing the return. For example, an investment that doubled in 3 years has ~26% CAGR, while one that doubled in 8 years has ~9% CAGR. CAGR allows fair comparison between investments of different time periods.

CAGR is ideal for comparing lump sum mutual fund investments over different time periods. Most mutual fund fact sheets display 1-year, 3-year, 5-year, and since-inception CAGR. When comparing funds, always compare CAGR over the same time period. Past CAGR does not guarantee future returns but helps assess fund manager performance.

CAGR has several limitations: it assumes the investment grows at a steady rate and ignores volatility; it cannot handle multiple cash flows (for SIP or SWP, use XIRR); it does not account for risk; and it can be misleading for short periods (<1 year). Always use CAGR alongside other metrics like standard deviation, Sharpe ratio, and rolling returns for a complete picture.