{"id":5485,"date":"2024-06-05T12:10:39","date_gmt":"2024-06-05T12:10:39","guid":{"rendered":"https:\/\/wp-api.pocketful.in\/blog\/?p=5485"},"modified":"2025-03-07T08:38:48","modified_gmt":"2025-03-07T08:38:48","slug":"xirr-vs-cagr","status":"publish","type":"post","link":"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/","title":{"rendered":"XIRR Vs CAGR: Investment Return Metrics"},"content":{"rendered":"\n<p>We all know that we should choose securities that generate the highest return. But have you wondered which return should we consider while evaluating securities?&nbsp;<\/p>\n\n\n\n<p>This blog will delve deeper into two of the most popular methods to evaluate returns.&nbsp;<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#What_is_CAGR\" title=\"What is CAGR?\">What is CAGR?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#What_is_XIRR\" title=\"What is XIRR?\">What is XIRR?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#What_is_the_difference_between_CAGR_XIRR\" title=\"What is the difference between CAGR &amp; XIRR\">What is the difference between CAGR &amp; XIRR<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#Suitable_Metric_to_Calculate_Mutual_Fund_Returns\" title=\"Suitable Metric to Calculate Mutual Fund Returns\">Suitable Metric to Calculate Mutual Fund Returns<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/wp-api.pocketful.in\/blog\/xirr-vs-cagr\/#Frequently_Asked_Questions_FAQs\" title=\"Frequently Asked Questions (FAQs)\">Frequently Asked Questions (FAQs)<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"h-what-is-cagr\"><span class=\"ez-toc-section\" id=\"What_is_CAGR\"><\/span>What is CAGR?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>CAGR stands for the Compounded Annual Growth Rate. It measures an investment\u2019s annual growth rate over time and is often used to measure and compare investments&#8217; past performance or to project their expected future returns. It calculates the constant average growth rate over a period of time for a long-term investment.<\/p>\n\n\n\n<p>The compound annual growth rate isn\u2019t a true rate of return. It describes the growth rate at which an investment has grown, assuming that the growth rate is the same every year and that the profits are reinvested at the end of each year. In reality, this kind of performance is unlikely because the growth rate depends upon multiple outside market factors. However, the CAGR can be used to smooth returns so that they may be more easily understood compared to alternative methods.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-mathematical-formula\">Mathematical formula<\/h3>\n\n\n\n<p class=\"has-text-align-center\"><strong>CAGR = (EV \/ BV)^(1 \/ N) \u2013 1<\/strong><\/p>\n\n\n\n<p class=\"has-text-align-left\">where<strong>: <\/strong><em>EV <\/em>= Ending&nbsp;value, <em>BV <\/em>= Beginning&nbsp;value, and <em>N <\/em>= Number&nbsp;of&nbsp;years<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-calculation\">Calculation<\/h4>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Divide the value of an investment at the end of the period by its value at the beginning of that period.<\/li>\n\n\n\n<li>Raise the result to an exponent of one divided by the number of years.<\/li>\n\n\n\n<li>Subtract one from the subsequent result.<\/li>\n\n\n\n<li>Multiply by 100 to convert the answer into a percentage.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-cagr-limitations\">CAGR Limitations<\/h3>\n\n\n\n<ol class=\"wp-block-list\">\n<li>It smooths the growth rate, so it does not give a true picture as it ignores volatility and implies that the growth during that time was steady.<\/li>\n\n\n\n<li>It doesn\u2019t account for the inflow and outflow of the funds from the portfolio over the period of time.<\/li>\n\n\n\n<li>It ignores volatility and is hence not useful in forecasting growth rates during unstable times.<\/li>\n\n\n\n<li>It is not relevant for early growth ventures as they are naturally volatile.<\/li>\n<\/ol>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-can-cagr-be-improved\">Can CAGR be improved?<\/h3>\n\n\n\n<p>The major limitation of CAGR is that it calculates a smoothed rate of return over time, ignoring volatility. To improve these limitations, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the investment\u2019s standard deviation [standard deviation measures total risk, which is the sum of systematic (market-specific) and unsystematic risk (investment-specific)].&nbsp;<\/p>\n\n\n\n<p>If the standard deviation is zero, the risk-adjusted CAGR is unaffected. If the standard deviation is larger, the risk-adjusted CAGR will be lower.<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"1024\" src=\"https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate.png\" alt=\"CAGR \" class=\"wp-image-3986\" style=\"aspect-ratio:1.3333333333333333;object-fit:cover;width:436px;height:auto\" srcset=\"https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate-1024x1024.png 1024w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate-300x300.png 300w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate-150x150.png 150w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate-768x768.png 768w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate-1536x1536.png 1536w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/03\/Mathematics-cuate.png 2000w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-xirr\"><span class=\"ez-toc-section\" id=\"What_is_XIRR\"><\/span>What is XIRR?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>XIRR, or Extended Internal Rate of Return, is a method to calculate the annualized return on investment with irregular Cash flows. It considers all cash inflows and outflows, along with the dates on which they occur, to calculate the annual rate of return. XIRR considers the timing and amount of each cash flow, making it a more accurate method for investments with irregular cash flows. It is more flexible than CAGR as different time horizons and different cash flows can be easily accounted for here.<\/p>\n\n\n\n<p>XIRR calculation is tricky, but any financial <a href=\"https:\/\/www.pocketful.in\/calculators\/xirr-calculator\">XIRR calculator<\/a> or spreadsheet can do this instantly. XIRR solves for the rate of return that makes the NPV (Net Present Value) of all cash flows equal to zero.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-the-difference-between-cagr-amp-xirr\"><span class=\"ez-toc-section\" id=\"What_is_the_difference_between_CAGR_XIRR\"><\/span>What is the difference between CAGR &amp; XIRR<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-table aligncenter has-small-font-size\"><table><thead><tr><th class=\"has-text-align-left\" data-align=\"left\">CAGR<\/th><th class=\"has-text-align-left\" data-align=\"left\">XIRR<\/th><\/tr><\/thead><tbody><tr><td class=\"has-text-align-left\" data-align=\"left\">Simple rate of return based on Beginning and Ending Value.&nbsp;<\/td><td class=\"has-text-align-left\" data-align=\"left\">More complicated and takes into account both investment outlay and cash flows.<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Suitable for calculating returns of one-time investment.<\/td><td class=\"has-text-align-left\" data-align=\"left\">Suitable for calculating returns of investments with irregular cash flows.<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Doesn\u2019t consider the timing of cash flows.<\/td><td class=\"has-text-align-left\" data-align=\"left\">Consider the timing of cash flows.<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Computes the average annual growth rate.<\/td><td class=\"has-text-align-left\" data-align=\"left\">Computes the Internal Rate of Return (IRR).<\/td><\/tr><tr><td class=\"has-text-align-left\" data-align=\"left\">Simple to calculate but less accurate.<\/td><td class=\"has-text-align-left\" data-align=\"left\">More complex to calculate but more accurate.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>Read Also:<\/strong> <a href=\"https:\/\/wp-api.pocketful.in\/blog\/itc-vs-hul\/\">ITC vs HUL: Comparison of India\u2019s FMCG Giants<\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-suitable-metric-to-calculate-mutual-fund-returns\"><span class=\"ez-toc-section\" id=\"Suitable_Metric_to_Calculate_Mutual_Fund_Returns\"><\/span>Suitable Metric to Calculate Mutual Fund Returns<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If you invest a lump sum amount without a regular series of investments, then one can use the CAGR as the timing of the investment, and periodic cash flows won\u2019t be an issue. But when you choose to invest through SIPs, regular outlays\/payments on a particular date, then using CAGR is not an appropriate way to calculate the return, as it ignores the timing of investments and considers only the first and last values. So, in such cases, one can use XIRR to calculate the actual return for your SIP investments.&nbsp;<\/p>\n\n\n\n<p>Therefore, if it&#8217;s an open-ended fund with irregular cash flows (in the form of SIPs), then XIRR is the preferred method. If it is a close-ended fund where the fund has a constant growth rate and accepts lump sum cash outlays only, then CAGR is the preferred method.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"1024\" src=\"https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana.png\" alt=\"XIRR vs CAGR\" class=\"wp-image-3597\" style=\"aspect-ratio:1.3333333333333333;object-fit:cover;width:519px;height:auto\" srcset=\"https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana-1024x1024.png 1024w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana-300x300.png 300w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana-150x150.png 150w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana-768x768.png 768w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana-1536x1536.png 1536w, https:\/\/cms-resources.pocketful.in\/blog\/wp-content\/uploads\/2024\/02\/Manage-money-pana.png 2000w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-conclusion\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Both methods are used to calculate returns, and both have pros and cons. Therefore, according to the time horizon and cash inflow\/outflow plan, one should decide which method to use.&nbsp;<\/p>\n\n\n\n<p>Absolute return is best for short-term investments, but CAGR is best for longer-term investments with fixed cash outlays. However, XIRR is the most useful in cases of multiple cash flows (SIPs) as it considers the timing of each cash flow while calculating an annualized return.<\/p>\n\n\n\n<figure class=\"wp-block-table has-small-font-size\"><table><thead><tr><th class=\"has-text-align-center\" data-align=\"center\">S.NO.<\/th><th class=\"has-text-align-left\" data-align=\"left\">Check Out These Interesting Posts You Might Enjoy!<\/th><\/tr><\/thead><tbody><tr><td class=\"has-text-align-center\" data-align=\"center\">1<\/td><td class=\"has-text-align-left\" data-align=\"left\"><a href=\"https:\/\/wp-api.pocketful.in\/blog\/nhpc-vs-ntpc\/\" target=\"_blank\" rel=\"noreferrer noopener\">NHPC vs NTPC<\/a><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">2<\/td><td class=\"has-text-align-left\" data-align=\"left\"><a href=\"https:\/\/wp-api.pocketful.in\/blog\/swiggy-vs-zomato\/\" target=\"_blank\" rel=\"noreferrer noopener\">Swiggy Vs Zomato<\/a><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">3<\/td><td class=\"has-text-align-left\" data-align=\"left\"><a href=\"https:\/\/wp-api.pocketful.in\/blog\/mahindra-mahindra-vs-tata-motors\/\" target=\"_blank\" rel=\"noreferrer noopener\">Mahindra &amp; Mahindra vs Tata Motors<\/a><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">4<\/td><td class=\"has-text-align-left\" data-align=\"left\"><a href=\"https:\/\/wp-api.pocketful.in\/blog\/tata-power-vs-adani-power\/\" target=\"_blank\" rel=\"noreferrer noopener\">Tata Power Vs Adani Power<\/a><\/td><\/tr><tr><td class=\"has-text-align-center\" data-align=\"center\">5<\/td><td class=\"has-text-align-left\" data-align=\"left\"><a href=\"https:\/\/wp-api.pocketful.in\/blog\/tata-steel-vs-jsw-steel\/\" target=\"_blank\" rel=\"noreferrer noopener\">Tata Steel vs. JSW Steel<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-frequently-asked-questions-faqs\"><span class=\"ez-toc-section\" id=\"Frequently_Asked_Questions_FAQs\"><\/span><strong>Frequently Asked Questions (FAQs)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n<div class=\"saswp-faq-block-section\"><ol style=\"list-style-type:none\"><li style=\"list-style-type: none\"><h3 class=\"\"><strong>What is CAGR?<\/strong><\/h3><p class=\"saswp-faq-answer-text\">Compound Annual Growth Rate, or CAGR, is the annual growth of your investments over a specific period of time. In other words, it measures how much you have earned on your investments per year during a given interval.<\/p><li style=\"list-style-type: none\"><h3 class=\"\"><strong>What is XIRR?<\/strong><\/h3><p class=\"saswp-faq-answer-text\">XIRR, or Extended Internal Rate of Return, is the annualized return on investment while considering irregular cash flows.<\/p><li style=\"list-style-type: none\"><h3 class=\"\"><strong>Which calculation method is better, CAGR or XIRR?\u00a0<\/strong><\/h3><p class=\"saswp-faq-answer-text\">XIRR is better than CAGR as it is more flexible and can calculate the returns on investments with multiple cash flows at different times, while CAGR can only calculate the returns for a single cash inflow and outflow.\u00a0<\/p><li style=\"list-style-type: none\"><h3 class=\"\"><strong>Which method should one use to calculate mutual fund returns?<\/strong><\/h3><p class=\"saswp-faq-answer-text\">The answer depends on the type of investment. For lump sum investments, CAGR is a good enough measure of returns. However, for investments with irregular cash flows, such as SIPs, XIRR is a better measure of returns.<\/p><li style=\"list-style-type: none\"><h3 class=\"\"><strong>Can CAGR be negative?\u00a0<\/strong><\/h3><p class=\"saswp-faq-answer-text\">Yes. A negative CAGR indicates losses over time rather than gains.<\/p><\/ul><\/div>","protected":false},"excerpt":{"rendered":"<p>We all know that we should choose securities that generate the highest return. But have you wondered which return should we consider while evaluating securities?&nbsp; This blog will delve deeper into two of the most popular methods to evaluate returns.&nbsp; What is CAGR? CAGR stands for the Compounded Annual Growth Rate. It measures an investment\u2019s [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":5655,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"is_paper_insight":false,"paper_insight_image":0,"paper_insight_pdf":0,"paper_insight_ppt":0,"footnotes":""},"categories":[19],"tags":[],"class_list":["post-5485","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mutual-funds"],"acf":{"freelancer":"Twinkle Ranpise"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v20.13 (Yoast SEO v21.2) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>XIRR Vs CAGR: Investment Return Metrics - Pocketful<\/title>\n<meta name=\"description\" content=\"Dive into the financial terms of XIRR and CAGR, exploring the difference between XIRR vs CAGR &amp; choose which is better.\" \/>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"XIRR Vs CAGR: Investment Return Metrics\" \/>\n<meta property=\"og:description\" content=\"Dive into the financial terms of XIRR and CAGR, exploring the difference between XIRR vs CAGR &amp; 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