XIRR vs CAGR

XIRR Meaning in Mutual Funds

XIRR full form is Extended Internal Rate of Return. It is a method to calculate the annualised return on investments with multiple cash flows occurring at irregular intervals. This variation of the Internal Rate of Return (IRR) is particularly useful for the best SIP plans and Systematic Withdrawal Plans (SWPs). It also works well in any scenario where cash flows occur at varying times and in different amounts. XIRR takes into account the dates, amounts, and time value of money when buying and selling mutual funds. 

Formula and Numeric Example of XIRR

The XIRR can determine the annualised return on investments when irregular cash flows, such as investing or withdrawing sums at different times, are present.

In Excel, you can calculate it with the formula:

=XIRR(values, dates)

Where, 

Values: Your cash flows (money you invest is written as a negative number, money you receive back is positive).

Dates: The exact dates on which each cash flow happened.

Now, for example, on 1 January 2020, you invest ₹1,00,000 (recorded as a negative amount, as it is an outflow). 

And, on 1 July 2020, you add a further ₹50,000 to the investment (also a negative outflow). 

Finally, on 31 December 2020, you received ₹1,60,000 (recorded as a positive amount, as it is an inflow).

So in Excel:

• Values: -100000, -50000, 160000

• Dates: 01/01/2020, 07/01/2020, 12/31/2020

Excel calculates the yearly return by considering when and how much each deal was worth using the XIRR algorithm. This makes XIRR effective for Systematic Investment Plan in India and investments with irregular cash flows. 

CAGR Meaning in Mutual Funds

Compound Annual Growth Rate, or CAGR, is the rate at which an investment grows yearly, assuming that the returns are compounded and the growth rate stays the same. It indicates the rate at which your investment would have grown if it had increased at a steady rate each year. It is a straightforward and useful tool for long-term performance analysis, but it does not account for the timing of additional investments or withdrawals. As a result, it is less suitable for investment methods involving periodic contributions, such as Systematic Investment Plans (SIPs).

Formula and Numeric Example of CAGR

The CAGR measures an investment's yearly growth rate over a given period, assuming it remains constant. The CAGR formula is:

CAGR = (Ending Value / Starting Value)^(1 / Number of Years) – 1 

Let’s say you invested ₹50,000 in a mutual fund on January 1, 2015. By January 1, 2020, the investment had grown to ₹65,000.

• Starting Value: ₹50,000

• Ending Value: ₹65,000

• Number of Years (n): 5

Calculation:

CAGR=(65,000/50,000 ​)1/5​−1≈0.054 or 5.4%

This means your investment grew at an average rate of 5.4% per year over the 5 years.

Difference Between XIRR and CAGR

XIRR and CAGR are ways to determine how much an investment has earned, but they are very different in dealing with cash flows and periods. It is important to know these differences between CAGR vs XIRR to choose the right metric for your business analysis:

XIRR vs CAGR: Pros and Cons

Investors can select the most precise metric for evaluating their returns by knowing the strengths and limitations of each metric.

Key Takeaways

XIRR (Extended Internal Rate of Return) and CAGR (Compound Annual Growth Rate) are commonly used metrics. While both measure annualised returns, their calculation, application, and suitability differ. XIRR accounts for the timing and size of irregular cash flows, making it ideal for Systematic Investment Plans (SIPs) and staggered investments. In contrast, CAGR assumes a constant growth rate, making it better suited for lump-sum investments. By understanding these indicators, investors can choose the proper performance measure for their investment structure and financial goals. 

To get the most out of your investments, start SIP in the best mutual funds in India and pick the right metric for your investment plan to make smart choices.