XIRR Vs CAGR

XIRR Vs CAGR

The main difference between XIRR and CAGR is that the CAGR method can be used to determine the investment returns from a one-time lump sum investment, whereas XIRR is more suitable for investors using SIP. Even those who are repeatedly investing in a fund through multiple transactions find XIRR more suited to their goals. 

This article covers: 

What is XIRR in Mutual Fund?

The XIRR, also known as Extended Internal Rate of Return, is a method used to determine the average annualized return rate. It is an optimal method of return for the type of investments that includes SIP (Systematic investment plan). 

To be more specific, every single cash flow is regarded as an individual investment, and the return on investment is measured using the details of this cash flow in the XIRR method. The process repeats itself for a specific investment period, and at the end of the investment period, the return rate is averaged over. All the investors who invest using SIP use the XIRR method to accurately evaluate the produced returns.

How To Calculate XIRR?

To calculate the XIRR, you must imply a formula in the Microsoft Excel spreadsheet. The formula for calculating XIRR is given below:

=XIRR (values, dates, guess)

As you can see, three components are available in this formula. Here is a bifurcation of the same. The first component, ‘value,’ signifies the cash flow, here you need to keep in mind that the inflows will be regarded as positive cash flow, and outflows will be regarded as negative cash flow. Next, the component ‘dates’ conveys the dates for every single cash flow. The last parameter, ‘guess’ is an auxiliary element. You can insert it if you already know the projected XIRR estimation. 

If the ‘guess’ parameter remains empty when inserting the values, then Microsoft Excel will take a preset value of 0.10. The built-in function makes computing XIRR easy once the durations and cash flows have been shown in a spreadsheet in Microsoft Excel. Using the spreadsheet will be the easiest method to calculate the XIRR returns. 

For a better understanding, we can look at an example. Suppose Dinesh wants to invest in a mutual fund and he has opted for the SIP approach instead of investing all the money through the lump sum method. He will invest Rs. 5000 in a selected mutual fund scheme every month for 2 years without withdrawing any money from the scheme. 

Here you need to understand that the first installment, which is Rs. 5000, remains invested for 2 years or 24 months, the second installment remains invested for 23 months or 1 year and 11 months, and the list goes on until the last installment. Let us have a look at the details of the installment in a tabular format. 

SIP Installment (in Rs.)Date of investment
500010th January 2019
500010th February 2019
500010th March 2019
500010th April 2019
500010th May 2019
500010th June 2019
500010th July 2019
500010th August 2019
500010th September 2019
500010th October 2019
500010th November 2019
500010th December 2019

The same routine continues for the next year, and at the end of the investment period, the total investment amount will be Rs. 120000. If we assume that at the end of the investment period, the total investment turns out to be Rs. 200000, then the XIRR for this investment will be 29.1%. For the same investment period. 

A step-by-step process of calculating XIRR in Microsoft Excel

If you want to calculate the XIRR, you can easily use Microsoft Excel software. Here is a step-by-step process you can follow to effectively calculate the XIRR in MS Excel:

  1. First, open the Microsoft Excel software on your preferred device (mobile, laptop, computer). 
  2. In the given table, write the current date along with all the investment amounts (as negative figures) and also the current value of the entire investment as the positive figure.
  3. While inserting the data, remember that you must mention all the dates in the first column, whereas in the second column, you must write down the cash flow.
  4. In the next step, you must insert the XIRR formula, while the cash flow range should be considered as ‘values.’ Be careful while writing down the data range because the data range needs to be the perfect match with the values range. For instance, if the data range has 20 rows, the value range should also possess 20. If any mismatch happens, the formula will display an error message. 
  5. After successfully entering the formula along with its data range, you must press ‘enter’ to evaluate the XIRR number. The result you will receive will be in the numeric format (by default); in order to bring it to the percentage format, you will have to multiply the result by 100. You can also format the cell beforehand to show you the results in terms of percentage. 

CAGR In Mutual Fund

CAGR, or Compound Annual Growth Rate, is one of the most common terms used to measure the returns from mutual fund schemes. With the help of CAGR, you will be able to know how a particular mutual fund has performed as it gives the aggregate yearly growth or the decline that your mutual fund investment has experienced. 

Let us look at how the CAGR works with the following example. Suppose Mr. Malik has invested Rs. 50000 in a mutual fund for 6 years. He invested the money on 25th March 2014, and at that, the NAV of the mutual fund was 10.00. This means he had received 5000 units. After 6 long years, he received a total of Rs. 160000 from his investment. Although his investment has increased by Rs. 110000, we have no idea if the return percentage is better than any other investment scheme or not.  

So first, we need to find out the return rate or CAGR of the mutual fund in order to compare it with any other investment schemes. The CAGR formula for mutual fund investment is 

CAGR = (Final Investment Value/Initial Investment Value)^1/n – 1

In the case of Mr. Malik, the CAGR will be 21.29%. The CAGR is usually used to measure the return rate if your investment period is 3 years, 5 years, 7 years, or 10 years. 

XIRR Vs CAGR –  Which is Better?

The key difference between XIRR and CAGR is that CAGR is used to calculate the annual growth rate of an investment. On the other hand, XIRR (Extended Internal Rate of Return) is a financial metric that calculates the internal rate of return for a series of cash inflows and outflows.

ParticularsCAGRXIRR
DefinitionThis method considers every single cash flow during your investment period while determining the rate of return during the investmentIt is the average of all the yearly returns received by an investment while emphasizing the initial and ending values of the investment. 
Formula=[( End Value of Investment/ Initial Value of Investment ) ^( 1/time period in concern )] – 1= ∑CAGR of all installments
TenureFor CAGR, the tenure remains the same.Depending on the installment period, the tenure can change. 
Use caseIdeal for lump sum investment. If you want to find out the overall growth of the investment funds, then CAGR is the best measure for you. It only considers the initial value and ending value of the investment. An ideal method to retrieve the return on investment where multiple cash flow is involved. XIRR is not bound by the limitations faced by CAGR. 
MeasurementIt evaluates the performances of the invested lump sum amount.Only focuses on calculating the performance of the cash flow. 
Multiple cash flowDoes not take into consideration.Consider every single transaction. 
LimitationsCAGR is not an ideal formula for short-term investments like 12 months. If you don’t include the final redemption value, then XIRR won’t be able to offer the yearly return rate. 
Type of returnProvides absolute return rate during a specific period of time.Only offers yearly return rate.
Timing of cash flowHere only two different cash flows matter: the amount during the deposit and the amount during the withdrawal period. In this case, multiple cash flows are involved, which is why the timing of cash flow plays an important role. The return rate can increase or decrease based on the behavior of the cash flow.

XIRR Vs CAGR – For Multiple Cash Flows 

If your investment involves multiple cash flows, then it is better to use the XIRR method instead of CAGR to receive a more accurate return rate. The problem with CAGR is that it only considers the initial investment and the end result, which means your monthly investments won’t be able to influence the calculations. XIRR, on the other hand, considers each cash flow to provide the best results. 

XIRR Vs CAGR – For Evaluating Absolute or Annualized Returns

CAGR provides you with the average return rate during the entire investment period, which means for some years, the return on investment can be more, and for some years, it can be less, but CAGR won’t give you a clear picture of the same. XIRR provides a yearly or annual return rate so that you won’t get confused about the return on your investment. 

XIRR Vs CAGR – Time Period of Cash Flow 

The formula of CAGR does not consider the timing of the cash flow, which is why it is unsuitable for SIP, SWP, etc. XIRR considers every little detail of the cash flow, which includes inflows and outflows, value, date, etc, which is why it can offer you a clearer picture. 

XIRR Vs CAGR – Accuracy of the Results

If you are investing a lump sum amount (and it is a one-time investment), then using CAGR will give you the most accurate results. On the other hand, XIRR is perfect for investment through systematic investment plans because the formula emphasizes cash flow. 

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XIRR Vs CAGR- Quick Summary

  • XIRR considers the timing and amount of each investment, whereas CAGR does not, which is why XIRR returns are generally higher than CAGR returns.
  • XIRR (Extended Internal Rate of Return) is a method used to calculate the average annualized rate of return, particularly suitable for investments made through SIP (Systematic Investment Plan).
  • The XIRR formula in Microsoft Excel includes three components: values (cash flow), dates (dates for every single cash flow), and guess (an optional auxiliary element to insert if you already know the projected XIRR estimation).
  • To calculate XIRR in Microsoft Excel, you can follow a step-by-step process that involves writing the dates and investment amounts (negative figures), and using the XIRR formula.
  • The CAGR (Compound Annual Growth Rate) method is suitable for one-time lump sum investments, while XIRR is suitable for SIP investments.
  • While the CAGR gives the average return rate for a specific period, XIRR considers the cash inflows and outflows to provide an accurate annual return rate.
  • CAGR should be used for 3 years and more investments, whereas XIRR can be used for monthly investments. 

XIRR Vs CAGR- Frequently Asked Questions

1. What is the difference between XIRR and CAGR?

The main difference between CAGR (Compound Annual Growth Rate) and XIRR (Extended Internal Rate of Return) is that CAGR represents an investment’s average annual growth rate over a specific period, assuming the investment has been compounded annually. In contrast, XIRR is used to calculate the aggregate return rate for investments with irregular cash flows, such as multiple investments or withdrawals, over a defined period.

2. What is XIRR vs CAGR for SIP?

If you are investing through SIP, the CAGR formula won’t work. XIRR provides a solution to this problem. Many investors use SIP for investment, and XIRR can accurately calculate their returns by primarily monitoring their cash flow. 

3. Is XIRR yearly return?

Yes, XIRR is a yearly form of return. When calculating your investment returns through XIRR, you will always find the annual or yearly return.

4. Which MF has the highest CAGR?

  • Quant Small Cap Fund – 24.63%
  • Tata Digital India Fund – 23.34%
  • ICICI Pru Technology Fund – 22.97%
  • Quant Tax Plan – 22.55%
  • Aditya Birla SL Digital India Fund – 22.31%
  • SBI Technology Opp Fund – 22.22%

5. What is a good XIRR in a mutual fund?

An equity mutual fund with a good XIRR will range between 11% to 14%, whereas the number remains between 7% to 9% for a debt mutual fund. You can also compare the XIRR rates of different mutual fund investments to find out the best investment scheme for yourself.

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