Mutual Funds

CAGR vs XIRR Mutual Fund Returns Comparison

By admin
28 October 2024
3 mins read

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CAGR vs XIRR Mutual Fund Returns Comparison

Mutual fund returns are one of the most important factors taken into consideration when analysing these investment options. Experienced investors often compare their historic returns to identify schemes that will offer the highest returns. But how do they go about calculating a mutual fund return?

Well, with metrics such as the Compound Annual Growth Rate (CAGR) and the Extended Internal Rate of Return (XIRR). While the two help achieve the same goal, there is a difference in their application.

This article explores what is the difference between XIRR and CAGR, and help you choose the right one to facilitate informed decision making when it comes to your investment strategies.

What is CAGR and XIRR?

CAGR is a metric that helps you ascertain investment returns. Unlike absolute return, which measures the point-to-point return while ignoring time, CAGR calculates the average annual return by considering a first investment, final value and the elapsed time. It helps facilitate comparison between different asset classes.

XIRR takes into account all cash outflows and inflows, such as capital gains and dividends, over a particular timeframe to calculate the returns generated. It is best suited to investors looking to assess and differentiate the performance of specific stocks in their portfolios.

Difference Between CAGR and XIRR

Here’s a concise table to understand CAGR’s and XIRR’s differences.

Basis of Difference	CAGR	XIRR
Definition	CAGR calculates the rate of return on the basis of the initial and final investment value	XIRR calculates the rate of return on the basis of both cash flows and investments
Calculation	Calculates the returns of constant investments	Calculates the returns of irregular cash flows
Timing of Cash Flows	Ignores the timing of cash flow	Factors in the timing of the cash flow
Inclusion of Cash Flow	Needs only the first and last investment amounts	Requires all cash flows for accurate calculation
Type of Investment	Is only applicable to investments that have a fixed investment amount	Can manage investments that have multiple inflows and outflows of cash
Rate of Return	Factors in the average annual rate of growth	Factors in the internal rate of return
Complexity	Requires a simple, straightforward calculation method	Requires a comparatively more complex calculation method
Accuracy	Can be less accurate as it ignores the timing and value of the cash flow	Is accurate as it factors in the timing and value of each cash flow

To Sum Up

Now that you know the difference between CAGR and XIRR, you’re better placed to not only choose the one that suits your goals best but also to make a data-backed investment decision. Once you have your answer, all you have left to do is select a reliable financial platform.

For this, look no further than Tata Capital Moneyfy. The answer to all things financial, from stocks and mutual funds, to loans and fixed deposits, Tata Moneyfy helps you meet all your financial needs in one place. So, grow your investment portfolio, apply for a loan or even get a credit card- all with Tata Capital Moneyfy.