Now Reading: CAGR, XIRR, IRR: How mutual fund investors should calculate returns
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CAGR, XIRR, IRR: How mutual fund investors should calculate returns
CAGR, XIRR, IRR: How mutual fund investors should calculate returns
Mutual fund returns are expressed using terms such as CAGR, XIRR and IRR, each suited for different investment types. Compounded Annual Growth Rate (CAGR) shows the average annual return over a specific…
Mutual fund returns are expressed using terms such as CAGR, XIRR and IRR, each suited for different investment types. Compounded Annual Growth Rate (CAGR) shows the average annual return over a specific period, assuming returns compound every year, and is best for lumpsum investments. The formula is: (end value / beginning value) ^ (1 / number of years) – 1.
Extended Internal Rate of Return (XIRR) annualises returns for investments with cash flows at irregular intervals, making it ideal for SIP investors. Internal Rate of Return (IRR) assesses profitability by discounting cash flows to present value, and can be used for SIP, SWP, or lumpsum investments with multiple cash flows.
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Each metric solves a different problem. CAGR smooths away volatility for a single lump sum, which works for comparing fund performance over the same period. XIRR accounts for the timing of each SIP instalment, giving a more accurate picture for staggered investments. IRR discounts irregular cash flows to a single rate, useful when amounts vary by instalment. The choice matters most when an investor is evaluating a SIP against a lumpsum: CAGR will not capture the time value of money for periodic contributions. The practical takeaway is to match the metric to the cash flow pattern, and to use XIRR for SIPs, CAGR for lump sums, and IRR for mixed or irregular schedules.
The Securities and Exchange Board of India (SEBI) mandates that fund houses use standardised calculation methods in their factsheets, but the onus remains on the investor to pick the right tool for their own portfolio.
Source: economictimes.indiatimes.com
This brief was synthesised by AI from the source linked above.
