XIRR vs CAGR: Which is the right way to calculate mutual fund returns?
mutual funds, you should ideally examine the past returns of all the schemes that you want to invest into. And since there are a number of ways to calculate the past returns, you should opt for the one that suits you the most. For instance, XIRR and CAGR are among the two most preferred parameters that are used to calculate the returns on various investment products including mutual fund returns.
Most investors get confused as to which parameter should one go for. Why should one measure the return on investment on their mutual fund investment in the first place? To find this out we have to explore XIRR and CAGR in detail to understand which method is the right way to calculate mutual fund returns. XIRR stands for extended internal rate of return.
It is a method that is used to calculate the annualised return on investment when cash flows happen at irregular intervals. It takes into account 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.
CAGR stands for Compound Annual Growth Rate and is a method that is used to calculate the annualised return on investment when cash flows occur at regular intervals. It assumes a constant rate of growth over a specific period and calculates the average rate of return during that period. CAGR is useful for understanding the growth rate of an investment over time and is commonly used for long-term investments like mutual funds.
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