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How to Track & Evaluate Mutual Fund Performance
In summary
CAGR and XIRR are both used to measure investment returns, but they work with different cash-flow patterns. CAGR suits a single investment, while XIRR accounts for multiple investments and withdrawals made on different dates.
- CAGR measures annualised growth between an initial and final value.
- XIRR considers the amount and date of each cash flow.
- CAGR is generally suitable for a one-time lumpsum investment.
- XIRR is useful for SIPs and investments with multiple transactions.
- A CAGR calculation needs an initial value, final value, and investment period.
- XIRR needs the amount and date of each relevant cash flow.
The Bajaj Broking website provides investment-related information, but neither CAGR nor XIRR predicts future returns.
What is XIRR?
XIRR stands for Extended Internal Rate of Return. It measures your annualised return when investments and withdrawals happen on different dates.
For example, every instalment in an SIP remains invested for a different period. XIRR considers the amount and date of each instalment before calculating your overall return.
Investments are entered as negative values. Redemptions and the final investment value are entered as positive values. XIRR then calculates the rate at which the total value of these cash flows becomes equal.
XIRR is useful for SIPs, additional purchases, and partial withdrawals.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It shows the annual rate at which an investment would have grown from its starting value to its final value.
CAGR presents investment growth as one steady annualised rate. It does not show the actual return earned during each year or the changes experienced during the investment period.
CAGR works when you make one lumpsum investment without additional purchases or withdrawals.
How do XIRR and CAGR differ?
XIRR and CAGR both show annualised returns, but they use different inputs. The following comparison explains their purpose, calculation, and most appropriate use for investors.
| Particular | XIRR | CAGR |
|---|---|---|
| Cash flows | Handles multiple cash flows | Uses one initial investment |
| Transaction timing | Considers each transaction date | Does not consider additional transactions |
| Suitable for | SIPs and staggered investments | Lumpsum investments |
| Information required | Amount and date of each cash flow | Initial value, final value, and period |
| Calculation | Usually requires spreadsheet software | Can be calculated manually |
| Return shown | Personalised annualised return | Smoothed annual growth rate |
| Withdrawals | Includes withdrawals in the calculation | Does not handle interim withdrawals |
| Complexity | Requires detailed transaction records | Uses a simpler calculation |
CAGR is suitable when your investment has one starting value and one ending value. XIRR provides a more meaningful result when money moves in or out on different dates.
How is CAGR calculated?
You need only three details to calculate CAGR for a lumpsum investment. Each input represents one part of the investment’s complete growth journey over time.
- Initial value: The amount invested at the beginning
- Final value: The investment value at the end
- Number of years: The complete investment period
The CAGR formula is:
CAGR = (Final value ÷ Initial value)^(1/n) − 1
Here, “n” represents the number of years.
Illustrative CAGR example
Asha invests Rs. 1,00,000 towards a five-year financial goal. At the end of five years, her investment is worth Rs. 1,61,051.
CAGR = (Rs. 1,61,051 ÷ Rs. 1,00,000)^(1/5) − 1
CAGR = 10%
Her investment delivered a CAGR of 10% over five years. This does not mean the investment earned exactly 10% during every individual year.
How is XIRR calculated?
XIRR usually requires spreadsheet software because it uses an iterative calculation. You must enter every cash-flow amount and the exact date on which that transaction occurred.
The following illustrative example contains two investments and one final value. It shows how XIRR accounts for the different periods during which each amount remained invested.
| Date | Amount (Rs.) |
|---|---|
| 1 January 2020 | -1,00,000 |
| 1 January 2022 | -50,000 |
| 31 December 2024 | 1,80,000 |
The Excel formula is:
=XIRR(values, dates, [guess])
The two investments carry negative signs because they represent money paid. The final value carries a positive sign because it represents money received.
When should you use CAGR or XIRR?
Your choice should match the way you invested. Reviewing whether you made one transaction or several transactions helps you select the more appropriate return measure.
When should you use CAGR?
CAGR works when an investment has one starting amount and no intermediate transactions. The following situations show when it can provide a meaningful annualised return.
- You make one lumpsum investment.
- You make no additional investments later.
- You do not withdraw money midway.
- You compare investments over the same period.
- You review the long-term growth of an index.
When should you use XIRR?
XIRR works when money enters or leaves your investment on different dates. The following situations show when transaction timing should form part of the calculation.
- You invest regularly through an SIP.
- You make additional lumpsum investments.
- You withdraw part of your investment.
- You invest different amounts on different dates.
- You want returns based on personal transactions.
Is XIRR or CAGR better for SIPs?
XIRR is generally more appropriate for Systematic Investment Plans. Every SIP instalment is invested on a different date and remains invested for a different duration.
CAGR assumes that the full amount was invested at the beginning. Using it directly for an SIP can give an inaccurate picture because later instalments had less time to grow.
XIRR considers each instalment and its date. This provides an annualised return based on your transaction history. You can start your SIP journey after checking the scheme’s objective, riskometer, costs, and investment horizon.
What are the advantages of XIRR and CAGR?
XIRR and CAGR offer different advantages because they measure different investment patterns. The following comparison shows how each method can help you understand returns more clearly.
| Measure | Advantages |
|---|---|
| XIRR | Considers every investment and withdrawal date, measures returns from SIPs and irregular transactions, and reflects your personal cash-flow pattern. |
| CAGR | Uses a simple formula, shows the annualised growth of a lumpsum investment, and helps compare investments held for similar periods. |
XIRR is useful when transactions occur on different dates. CAGR is useful when one initial investment remains invested without additional purchases or withdrawals.
What are the limitations of XIRR and CAGR?
Neither return measure provides a complete view of an investment. The following comparison explains what each calculation may leave out and where errors can affect the result.
| Measure | Main benefit | Limitation |
|---|---|---|
| XIRR | Considers every cash flow and date | Incorrect dates or amounts can change the result |
| CAGR | Provides a simple annual growth rate | Ignores intermediate investments and withdrawals |
| XIRR | Reflects personal transaction activity | Certain unusual cash-flow patterns may produce errors |
| CAGR | Supports comparison over equal periods | Hides yearly volatility and uneven performance |
XIRR depends on complete transaction records. A missing instalment, incorrect date, or wrong positive or negative sign can affect the calculated return.
Conclusion
CAGR and XIRR measure annualised returns for different investment patterns. CAGR suits a single lumpsum investment, while XIRR suits SIPs, additional purchases, and withdrawals made on different dates.
When comparing mutual funds, use the return measure that matches your transactions. Also review risk, costs, performance consistency, and your investment horizon. You can evaluate your portfolio through the Bajaj Broking website.
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Frequently Asked Questions
Understanding XIRR and CAGR
Comparing XIRR and CAGR
Using XIRR for mutual fund returns
How is XIRR different from CAGR?
CAGR measures annualised returns when there is one initial investment and one final value. XIRR handles multiple investments or withdrawals made on different dates.
When should I use XIRR to evaluate mutual fund returns?
Use XIRR when your mutual fund investment involves multiple cash flows, such as SIP instalments, additional investments, partial withdrawals, or redemptions occurring on different dates.
Is XIRR better than CAGR?
Neither is always better. CAGR suits a single investment over time, while XIRR is more suitable when investments or withdrawals occur on multiple dates.
Can XIRR be converted into CAGR?
Not directly in every case. XIRR reflects irregular cash flows, while CAGR assumes one starting value and one ending value over a fixed period.
Can CAGR and XIRR show different returns for the same mutual fund?
Yes. They can differ because CAGR ignores intermediate cash flows, while XIRR considers the amount and timing of each investment or withdrawal.
How does the timing of cash flows affect XIRR?
XIRR considers when each investment or withdrawal occurs. Changing the timing of cash flows can therefore change the annualised return calculated for the investment.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
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Disclaimer
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The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
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Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.