XIRR vs CAGR: Which is better for calculating Mutual Fund Returns?
What is XIRR?
XIRR, or Extended Internal Rate of Return, calculates annualised investment returns with irregular cash flows.
Features of XIRR
Considers the timing & amount of each cash flow.Provides a precise measure of investment performance.Applicable on investments with multiple cash flows.
What is CAGR?
CAGR stands for Compound Annual Growth Rate and is a method to calculate the annual returns on investment with regular cash flows.
Features of CAGR
Assumes a constant rate of growth over a specific period.Commonly used for long-term investments like mutual funds.
XIRR vs CAGR
Above image shows the comparison of XIRR vs CAGR.
Which One to Choose?
While calculating mutual fund returns, it is important to choose the method that suits the investment pattern & cash flow behaviour of the fund.
Case 1: Irregular Cashflows
XIRR provides a more accurate measure of the annual return, accounting for the timing and amount of each cash flow.
Case 2: Regular Cashflows
CAGR gives a simple measure of the average annual return over a specified time period, making it suitable for long-term investment analysis.
The Final Word
Both XIRR & CAGR are valuable tools to calculate mutual fund returns, each with its specific use. Knowing when to apply them empowers investors in making informed decisions.