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# What is XIRR in Mutual Funds? How is it Different from CAGR?

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• 26 Jul 2024

XIRR is a method used to compute annualised returns from mutual funds applicable for investments made via systematic investment plans (SIPs). It is a single rate of return applicable for every SIP instalment and redemption.

XIRR in mutual funds gives the annual average return for each SIP instalment. Unlike CAGR, it accounts for irregular cash flows and multiple periods, making it an essential tool for analysing mutual fund returns.

The advantages of XIRR are as follows:

• ### More accurate performance measurement

XIRR helps you measure the performance of your mutual fund investments more accurately. This is because it factors in the exact timing of cash flows. Also, since it considers withdrawals, it helps you measure the performance of your mutual funds in a more nuanced manner.

• ### Factors in time value for money

XIRR factors in the time value of money by factoring in specific dates and cash flows. Thus, it helps you evaluate the actual return on your investment.

Along with the advantages, XIRR also has certain limitations. These include:

• ### Warrants accurate cash flow data

XIRR requires you to input accurate and complete cash flow data. This includes the date and amount of each cash flow. If you input incomplete or inaccurate data, it can affect the calculation.

• ### Sensitive to small changes in data

XIRR is a sensitive metric. Even minor alterations in cash flow data can make it challenging to compare different funds based solely on XIRR returns.

You can quickly compute XIRR in MS Excel using the XIRR function. The formula to calculate XIRR in Excel is:

### =XIRR (Values, Dates, [Guess]), where

• Values are the total amount invested, including redemption. For every SIP, the value is negative, whereas the investment value on the date of the XIRR calculation should be positive.
• Dates refer to the investment date
• Leave the guess part blank

To calculate XIRR in Excel:

• Enter the investments done on various dates in one column
• Enter the date of each transaction in another column
• Enter the current value of your investment along with the date in the last row
• Use the XIRR function given above in another row

Assuming you start an SIP of ₹ 10,000 on 10th January 2023 and continue investing the same amount throughout the year on the same date. As of 10th December 2023, your maturity amount is Rs 1.3 lakhs. In this case, the XIRR of your investment stands at 18.4% (see image below).

CAGR is used to calculate the annualised return of your mutual fund investment when cash flow occurs at regular intervals. Assuming a constant growth rate over a specific period, it computes the average rate of returns during that period.

CAGR in mutual funds offers the following advantages:

• It’s easy to comprehend and calculate
• Provides a standardised measure to compare the performance of different funds over a specific period of time

Like XIRR, CAGR also has certain limitations, the foremost of which is:

• ### Constant growth assumption

CAGR assumes constant growth rate throughout the analysis period. This may not align with real life scenarios where market conditions and external factors could lead to fluctuations.

• ### Smoothens volatility

CAGR doesn’t account for volatility or fluctuations in periodic returns and may hide periods of negative returns.

CAGR formula and example

Use the following formula to calculate CAGR:

CAGR = [(End Value/Beginning Value) ^ (1/No. of years) - 1] x 100

Suppose you invested ₹ 50,000 in a mutual fund, and the value of your investment has grown to ₹ 1 lakh in 5 years. CAGR, in this case, would be 14.87%. There are online CAGR calculators that help you easily calculate CAGR.

While you can use XIRR and CAGR to analyse the performance of your mutual fund investment over a period of time, the similarity ends here. The table highlights the differences between them on various parameters:

Parameter XIRR CAGR
Cash flow
Factors in irregular multiple cash flows
Assumes single investment
Timing
Considers timing of cash flow
Doesn’t consider the timing of cash flow
Precision
Highly accurate
Less accurate
Complexity
More complex
Relatively simple
Use case
More suitable for SIPs
More suitable for lump sum investments

### Conclusion

Depending on your investment mode, you can use XIRR or CAGR. Both have pros and cons. However, XIRR presents a better picture of the performance of your mutual fund investments, especially those made via SIPs.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.

## FAQs

Both XIRR and CAGR have their pros and cons. That said, XIRR gives a more accurate result of your mutual fund investment as it factors in irregular multiple cash flows and considers the timing of flow.

20% XIRR means that accounting for all cash inflows and outflows over a specific period, your investment has grown at an annualised rate of 20%.

12% CAGR is considered good. This is because a 12% CAGR is above the average inflation rate. You can beat inflation with a 12% CAGR.