Understanding CAGR, IRR, and XIRR – Simplified Guide
Ever wondered how to calculate investment returns? There are three main methods:
- CAGR – Compounded Annual Growth Rate
- IRR – Internal Rate of Return
- XIRR – A powerful Excel function for irregular investments
📌 What is CAGR?
CAGR (Compounded Annual Growth Rate) is used for a single lump sum investment. It shows how much your investment grows each year at a steady rate.
💡 Example:
You invest $10,000 in a mutual fund, and after 5 years, it grows to $16,000. The CAGR formula helps find the annual return percentage.
Most mutual fund websites use CAGR to show past performance.
📌 What is IRR?
IRR (Internal Rate of Return) is used when you invest at regular intervals, like a monthly SIP (Systematic Investment Plan).
💡 Example:
You invest $500 every month in a mutual fund for 3 years. The IRR formula calculates the return based on these fixed, periodic investments.
📌 What is XIRR?
XIRR is an Excel function used when investments happen at irregular intervals – different dates, amounts, or both.
💡 Example:
You invest:
- $1,000 in Jan
- $2,500 in March
- $1,200 in July
- Withdraw $3,000 after 2 years
XIRR calculates the exact return, considering these irregular cash flows.
🎯 Which One Should You Use?
- CAGR: Best for judging a fund’s past performance (used on most mutual fund websites).
- IRR: Best for regular SIP investments.
- XIRR: Best for complex cases (multiple investments & withdrawals).
✅ **Pro Tip:** If you are checking mutual fund returns online, they usually show CAGR. For SIP returns, they may use IRR/XIRR.
🚀 Final Thoughts
Understanding CAGR, IRR, and XIRR helps you analyze investment returns effectively. Next time you check mutual fund performance, you’ll know exactly what those numbers mean!
💬 Have questions? Drop them in the comments!