🧩 XIRR vs CAGR: Which Metric Best Measures Your Investment Returns? 🧩
Master the difference between XIRR and CAGR to accurately assess your investment returns, mutual fund returns, and SIP returns. Discover the ideal financial metric for your portfolio performance.
Understanding Key Financial Metrics for Investment Returns
When evaluating portfolio performance, two critical financial metrics are XIRR (Extended Internal Rate of Return) and CAGR (Compound Annual Growth Rate). These metrics measure investment returns differently, impacting how you analyze mutual fund returns and SIP returns.
The choice between XIRR vs CAGR hinges on your investment pattern. CAGR simplifies annualized returns for lump sum investments, while XIRR excels in calculating returns for SIP returns or irregular cash flows.
XIRR vs CAGR: Comparing Financial Metrics
Explore the core differences between these essential financial metrics for investment returns:
What is CAGR?
Compound Annual Growth Rate (CAGR) measures the annualized returns of an investment over a period longer than one year. It’s a reliable financial metric for assessing mutual fund returns from a single investment.
CAGR is calculated using this formula:
CAGR = (Ending Value/Beginning Value)^(1/n) – 1 where n is the number of years.
For example, if you invest ₹10,000 and it grows to ₹19,500 over 3 years, your CAGR would be ((19,500/10,000)^(1/3))-1 = 24.93% annualized returns.
What is XIRR?
Extended Internal Rate of Return (XIRR) calculates investment returns for multiple cash flows at different times, making it ideal for SIP returns and complex portfolio performance.
XIRR is particularly useful for:
- SIP investments (monthly/quarterly)
- Portfolios with multiple entry/exit points
- Scenarios with irregular investments or withdrawals
Unlike CAGR, XIRR accounts for exact transaction dates, offering precise annualized returns through iterative calculations.
Comparison Table: XIRR vs CAGR
| Feature | CAGR | XIRR |
|---|---|---|
| Cash Flows | Single initial investment | Multiple investments/withdrawals |
| Time Consideration | Only beginning and end dates | Exact dates of all transactions |
| Best For | Lump-sum investments | SIPs, irregular investments |
| Complexity | Simple calculation | Complex, requires dates |
| Accuracy | Less accurate for multiple flows | More accurate for real-world scenarios |
When to Use XIRR vs CAGR for Investment Returns
Selecting between XIRR and CAGR depends on your investment type and portfolio performance goals:
Use CAGR When:
- You make a single lump-sum investment
- There are no intermediate cash flows
- You need simple annualized returns
- Comparing mutual fund returns with similar patterns
For example, if you invest ₹50,000 in a mutual fund for 5 years, CAGR is ideal for calculating investment returns.
Use XIRR When:
- You invest regularly (like SIPs)
- You add or withdraw funds at different times
- Your portfolio has multiple cash flows
- You need precise SIP returns accounting for timing
For instance, a ₹5,000 monthly SIP in a mutual fund over 3 years requires XIRR for accurate annualized returns.
Understanding XIRR vs CAGR ensures you use the right financial metric for your investment returns, whether for mutual fund returns or complex portfolio performance.
Investment Returns Calculator
Calculate your investment returns using XIRR or CAGR to compare financial metrics:
CAGR Result
Your Compound Annual Growth Rate is:
XIRR Result
Your Extended Internal Rate of Return is:
Real-World Examples: XIRR vs CAGR for Investment Returns
Example 1: Lump Sum Investment (Use CAGR)
You invest ₹1,00,000 in a mutual fund on Jan 1, 2020. By Dec 31, 2022 (3 years), it grows to ₹1,33,100.
CAGR Calculation: (1,33,100/1,00,000)^(1/3)-1 = 10% annualized returns
CAGR is perfect for measuring mutual fund returns from a single investment.
Example 2: SIP Investment (Use XIRR)
You invest ₹5,000 monthly in a mutual fund from Jan 2020 to Dec 2022 (36 months). Total invested = ₹1,80,000. Final value = ₹2,10,000.
CAGR would be misleading for SIP returns, as it assumes a single investment.
XIRR Calculation (factoring in monthly investment dates) might show 12% annualized returns, accurately reflecting portfolio performance.
These examples highlight why XIRR vs CAGR matters—choosing the right financial metric ensures accurate investment returns analysis.
Master Your Portfolio Performance Analysis
With a clear understanding of XIRR vs CAGR, you can accurately evaluate your investment returns, mutual fund returns, and SIP returns.
Key takeaways:
- Use CAGR for simple lump-sum investment returns
- Use XIRR for SIP returns and multiple transactions
- Compare similar financial metrics for fair investment analysis
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