CAGR vs XIRR for mutual fund returns
CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return) are two methods to compute mutual fund returns. They differ in application:
- CAGR: For single-investment-single-withdrawal scenarios.
- XIRR: For multi-cash-flow scenarios like SIPs, SWPs.
CAGR
Formula
CAGR = (Final value / Initial value)^(1/Number of years) - 1
When to use
- Lump-sum investment, lump-sum redemption: One investment, one redemption.
- Direct stock investment: Single buy, single sell.
Example
Rs 10 lakh invested in 2019, sold for Rs 18 lakh in 2024 (5 years):
- CAGR = (18/10)^(1/5) - 1 = 12.47% per year.
XIRR
What it computes
XIRR computes the annualised return considering all cash flows (investments and withdrawals) at their specific dates. It is the Internal Rate of Return extended for irregular cash-flow timing.
When to use
- SIP investments: Multiple monthly investments + final redemption.
- SWP withdrawals: Initial investment + multiple monthly withdrawals.
- Multi-purchase, multi-redemption portfolios.
Calculation
XIRR is computed iteratively. Excel/Google Sheets has built-in XIRR function:
=XIRR(values, dates)
Where:
values: Cash flow amounts (negative for investments, positive for redemptions).dates: Corresponding dates.
Example: SIP XIRR
5-year SIP of Rs 10,000 monthly + final redemption at Rs 9.5 lakh:
- 60 monthly investments of -Rs 10,000 each.
- One redemption of +Rs 9,50,000 at the end.
- Total invested: Rs 6,00,000.
- XIRR ≈ 17.5% per year (annualised return considering the time-value of each instalment).
The CAGR-style computation (gross return Rs 9.5 lakh / Rs 6 lakh - 1 = 58%, annualised over 5 years = 9.6%) understates the actual rupee-cost-averaged return because it doesn’t account for the timing of cash flows.
Why XIRR is needed for SIPs
For SIP investments:
- Early instalments compound longer than later instalments.
- Average holding period across instalments is shorter than the SIP duration.
- CAGR computation over the full SIP period misstates the actual return.
XIRR correctly captures the time-weighted return considering the actual cash-flow timing.
Comparison summary
| Dimension | CAGR | XIRR |
|---|---|---|
| Cash flows | Single in, single out | Multiple in/out |
| Time consideration | Begin and end dates only | All cash-flow dates |
| Common use | Lump-sum investments | SIPs, SWPs, STPs |
| Computation | Simple formula | Iterative |
| Excel/Sheets | =RATE or manual | =XIRR |
See also
External references
References
- Mathematical literature on IRR and XIRR.
- Excel/Google Sheets XIRR function documentation.